Helicopter Ben | Investment and Business News

Markets tumble again – wage inflation drops – is this more like the 1930s than the 1970s?

June 12, 2008 | posted by Michael Baxter in inflation | comments (4) |

While all around the panic relates to inflation, and that we are in danger of seeing a re-run of the 1970s, more evidence emerged yesterday to suggest that the reality is quite different.

The 1970s, remember, were characterised by rising unemployment and rising prices. The Great Depression was characterised by rising unemployment and falling prices.

The 1970s crisis was initially kicked off by a surge in the price of oil, which led to an upward spiral of wage inflation. The era was characterised by strong union activity, and loose monetary policy – with negative real interest rates in many economies.

The 1920s/1930s depression was initially kicked off by falling asset prices, followed by banking collapse. It was a similar story in Japan in the 1990s.

When the stock market crashed in 1929, major indices did not return to their previous high until the early 1950s. House prices fell in the UK during the 1930s.

In a way it would actually be quite good if the present crisis was more like the earlier one. Policy makers in the 1920s and 1930s, and Japan more recently, made a series of mistakes. Japanese banks were slow to admit to the full extent of their losses. It seems unlikely – fingers crossed, those same mistakes will be repeated.

But the similarities with the 1970s are obvious too. Oil keeps rising. Although oil is much more expensive, even after allowing for inflation, than it was the 1970s, these days our consumption of oil takes up a smaller proportion of GDP. Oil would need to approach $200 and demand stay at current levels before our oil consumption to GDP was comparable to the 1970s. It does, however, seem quite possible this will happen.

Evidence of mounting inflation is everywhere – and around the world. In the UK, producer price inflation keeps hitting new all-time highs. But inflation is also a major problem in developing economies, including China, India, Russia, Brazil and Eastern Europe.

In the UK, evidence has emerged to suggest a new wave of strikes may begin. If inflation worsens, and union pressure leads to inflationary wage increases, then the only possible medicine will be sharp rises in the rate of interest, just at a time when slowing consumer spending, collapsing house prices and struggling industry suggest a desperate need for interest rates to be slashed.

But here is the other side of the argument, an argument that was strengthened yesterday.

Markets are down again. The FTSE 100 fell to 5723, 700 points below its start-of-year price. It is now 1,000 points below its seven-year high set last year, and more to the point is 1200 points below the all-time high of 6930 set on the last day of the last millennium. So in effect we are sill in a bear period. A bear period lasting eight and a half years – which we think is the longest bear run since the big one kicked off in 1929.

In the US, it is not quite so severe. The Dow hit its pre-dotcom crash peak on January 14 2000 – with a score of 11722. It passed that level in 2006, and at no stage this year has it fallen lower – although it did go within 20 points in March of this year. Right now the Dow is over 300 points above that mark – although it has fallen 500 points this week so it is quite possible it will fall below that mark soon.

But bear in mind the 1930s, 1940s and early 1950s saw either deflation or very modest inflation. Inflation today is much higher, and after allowing for rising prices, it seems the Dow is actually lower today – that’s in real terms, than in 2000.

More to the point, the NASDAQ is still only half of the heady heights it reached during the dotcom peak.

In other words, it is not just house prices that are falling off the edge of a cliff; US and UK major indices have suffered an appalling eight years or so.

But then yesterday also saw the unveiling of the latest UK job statistics.

It made the TV and radio news headlines – UK unemployment rose by 38,000, hitting 5.3 per cent, from 5.2 per cent the previous month.

It is no surprise. Sven-Goran Eriksson and Avram Grant are not the only people to have joined the dole queue lately. We all know that over the next few months jobs will be lost in the City, in retail and the housing sector.

Then again, by historical standards, unemployment is still low; will it stay low?

And this is when the debate gets interesting.

Because yesterday, to accompany news of the relatively small rise in unemployment, came another statistic which was more significant, but has not fallen under the full glare of the public spotlight.

Average earnings, including bonuses, rose by 3.8 per cent in the year to April 2008, down from 4.0 per cent in March. Average earnings, excluding bonuses or regular pay, rose by 3.9 per cent in the year to April, up from 3.8 per cent in March.

Remember, the retail price index rose by 4.2 per cent in the year to April. So it appears earnings have not kept pace with inflation.

Normally, wages are only creating inflationary pressure if their rate of change, minus improvements in productivity, is above the official inflation target. Economic productivity rose by 1.7 per cent over the year, so yes, wages are going up a little faster than they should, but only by a tiny amount.

Unions do not the have the muscle they once did. A repeat of the winter of discontent seems unlikely. There has been plenty of anecdotal evidence to suggest some workers at least are accepting pay cuts.

This is a trend to watch. So far it would seem that despite the escalating rises in oil and food, the dreaded secondary effect on wages is just not happening.

This is good news, but it could turn to bad news. Central banks need to watch this very carefully. Remember, there is typically an 18-month time lag between a change in the rate of interest and its full impact.

The combination of rising unemployment, falling asset prices – both property and equities, and modest wage rises which could easily turn into wage falls, means there is a real threat of deflation.

The challenge facing central banks is to anticipate deflation 18 months in advance, so that they can relax lending in time.

Right now, central banks seem to have an almost unprecedented balancing act. The economy could go either way – inflation or deflation. One wrong move – and it could be disastrous.

Senior management at commercial banks may be overpaid, but right now, central bankers deserve every penny of their remuneration.
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Ben flies through the sky like a hawk

June 4, 2008 | posted by Michael Baxter in US economy, inflation | comments (0) |

And with just a few words he was the golden boy again.

Fed chairmen are surely the most commonly vilified men in business. Well, at least they are up there with private equity and bank directors.

Ben Bernanke put his foot down, and down pumped an awful lot of gas into the US economy over the last few months – the result – it looks increasingly as if the US will avoid recession, but inflation has burst onto the scene.

Actually, US inflation is not really that awful, yet, but the fear is that the high price of oil will exert pressure down the line. Alan Greenspan slashed rates earlier this decade, and now, or so goes the argument, we are paying the price; the fear is Bernanke has made the same mistake.

The US rate of interest is 2 per cent, meaning the real rate – that’s after inflation – is negative, but then again, credit is hard to come by, banks are charging interest out at much higher rates than official Fed rates – maybe it doesn’t matter.

Others say the Fed went wrong because it both pumped money into the system and cut rates. The ECB by contrast has just gone for the money – and, or so goes the argument, as it has to be repaid, the move is not inflationary.

But what has Ben been up to? Is he aware of the inflation danger?

Yesterday he spoke, and in particular he zoomed in on the falling dollar. “In collaboration with our colleagues at Treasury, we continue to carefully monitor developments in foreign exchange markets,” he said, and the Fed was “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.”

And then he struck the hawk note. The Fed will “formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.”

So what does it mean? The US is unlikely to cut interest rates any time soon. Capital Economics said, “If oil prices drop back later this year there may still be scope for a further reduction in rates.”

The markets also concluded that the time of a free falling dollar with the Fed doing nothing has ended, and the greenback rose sharply on that and the price of gold and oil fell.

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It’s back, but can we return the inflation genie to its bottle?

June 2, 2008 | posted by Michael Baxter in inflation | comments (2) |

That Ben Bernanke knows a thing or two about depressions. If there is anyone alive today who has studied the US economic depression of the 1930s more than the current chairman of the US Federal Reserve, then it would be a surprise.

That is why many have been saying we will never see a repeat of that saga, nor will we see a repeat of the lost decade suffered in Japan, not while Ben is in charge anyway.

There is one snag with that argument – not all downturns are the same. The 1930s, and Japan’s lost decade, saw a crash in asset prices followed by deflation. And Mr B has been doing his best to ensure those characteristics are not repeated here.

But, and this is the danger, supposing it is not like that. Supposing the real threat is a return of 1970s style inflation, combined with sluggish growth – stagflation. The danger has to be that Ben, by slashing interest rates, is making things much worse.

Think of it this way. Imagine the economy is like a shower. A shower in which the water supply only responds slowly to a turn on the tap. So, one moment it is too cold, you turn up the hot tap, but it is still too cold. What do you do? Wait a little longer to see what happens, or turn up the hot tap some more?

The danger is that Ben Bernanke has turned up the hot tap before his previous tweakings had been given sufficient time to work. The result – well, very shortly scolding water might come flooding out.

But the analogy ends there. The economy is not like a shower – you can’t turn the inflation and growth taps on and off like that. Inflation doesn’t come pouring out one moment, and reduce to a trickle the next. Instead, it has been likened to a tube of toothpaste. Stopping inflation is the equivalent of squeezing toothpaste back into its tube.

It is an important point, because right now is a crucial moment. It is possible that inflation is being allowed to build, and that down the line it will come gushing out – across the world. The signs are certainly there to suggest this may happen.

Alternatively, if you believe oil and food prices are displaying all the hallmarks of a bubble, which will burst, sending prices spiralling down, we may re-discover deflation, after all. In which case Ben will seem like a genius – and may go down in history as the Fed’s best chairman to date.

Which scenario is right? In today’s issue we take a look at both sides of the debate. And to start with, let’s take a look at oil. Which way next for the black stuff – read the next article.

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Economic snapshot

May 6, 2008 | posted by Michael Baxter in UK economy, US economy, credit crunch | comments (1) |

The US is tottering. Latest figures say the US economy expanded by an annualised rate of just 0.6 per cent in the first quarter of 2008. Opinion is still mixed as to whether Uncle Sam will fall into full blown recession, or merely go close. Many expect recession, but in contrast the National Institute of Economic and Social Research has forecasted growth of 1.3 per cent this year – not good, but neither does this signify recession.

In the UK, it forecasts growth of 1.8 per cent both this year and next – that marks a slow down, but if the forecast proves right, the dream of uninterrupted economic growth will remain intact.

Recently, some leading and highly respected economists have suggested the credit crunch has passed the halfway stage – but others are still describing the crisis as the worst ever peacetime financial crisis.

In the US, this particular downturn is unusual because it has been led by falling house prices – unlike, for example, the previous recession which was caused by factors such as the dot com crash and 9/11.

House prices are now falling in the UK. It has now become a question of how big the falls will be, and for how long.

But opinion is mixed on how much this matters. Some say that there is so much spare equity in the UK housing market, that even if prices fell by 10 per cent, only a relatively small number of property owners would face negative equity.

Furthermore, many argue that consumer spending is only slightly influenced by house prices, so a fall in house prices will not lead to a corresponding fall in consumption. Others say this flies in the face of common sense – and of course falling house prices will lead to falling consumption.

Furthermore, they argue, house prices were pushed up too high by the irrational belief that house prices only ever go up – that the housing boom was at heart a speculative bubble and that house prices will overcorrect on the way down.

Bull points	Bear points
The current chairman of the US Federal Reserve also happens to one of the leading academic experts on the 1930s depression. Ben Bernanke spent years studying what could be done to avoid a repeat of that unhappy era – and he has been putting this knowledge into practice.	No two recessions ever have identical causes. The current financial crisis has significant differences with the 1930s depression – in particular the effect of globalization and rising commodity prices. What would theoretically have worked in 1929, may not work today, and could, by stocking up inflationary pressures, make things worse in the long-term.
The Bank of England has instigated an unprecedented measure to push liquidity back into the markets – by allowing banks to swap triple A, but illiquid, mortgage security into Treasury bills; this should restore inter bank lending.	Too much money was lent earlier this decade, creating too much debt. As house prices fall both in the US and UK, much of this debt can not be repaid. No amount of new money can alter this fundamental truth.
Warren Buffett, the world’s richest man, recently indicated recently that right now is a going-buying opportunity as he announced plans for major buying. In general, economic slowdowns often represent good buying opportunities.	But given the pessimistic economic forecast, equities have not yet fallen to the level one would have expected. George Soros recently predicted another dip to follow.
Thanks to the rise of economies such as China and India, the global economy is no longer reliant on the US.	But the US remains the most important economy. The dollar is falling and so are US imports – it remains to be seen if the global economy can afford to see its biggest customers tighten its belt.
The US government is boosting the US economy via a massive $150bn tax credit – which will boost some households by $1,200. Keynes once said in times of a debt crisis, cuts in interest rates are ineffective, as the last thing you need to do is try and get people to borrow more. He likened this to “pushing on string.” But the plan to give back tax to US consumers is exactly what Keynes would have recommended.	Many expect US consumers, who are so worried about prospects, to simply save the tax credit. In any case, the extra amount US consumes are spending on oil could counter-balance the benefit of the tax credit.

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Ben does it again

May 1, 2008 | posted by Michael Baxter in US economy | comments (1) |

Down went US interest rates yesterday. This time they were lowered by 0.25 per cent, to 2 per cent – but now markets are concluding that is the end of it. Not so long ago they were predicting US rates would eventually fall to 1 per cent, now markets are pricing-in rises in US interest rates later in the year.

The Fed is worried about inflation – two members of its rate setting committee voted against the cut.

This time the Fed changed its tone. It removed the words the “downside risks to growth remain” and added “uncertainty about the inflation outlook remains high.”

So that’s it then. The Fed reckons the risks to growth are receding, and that inflation is returning.

But many disagree. Capital Economics, for example, said, “However, the surge in energy prices since the start of the year (and many other commodity prices as well) looks more and more like an unsustainable bubble. We suspect that prices will fall back soon easing near-term inflationary pressures and leading to a drop back in inflation expectations as well. That would allow the Fed a free hand to respond to signs of further distress in the real economy.”

But the US rate of interest is now a full two percentage points lower than the euro rate. No wonder the dollar has fallen so far.

This is hitting the Eurozone economy – with Airbus, for example, forced to announce yesterday it was upping its prices.

The truth is, the falling dollar is, along with other things forcing the dollar down, proving a strain on the global economy.

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Fed digs deeper hole with rate cuts

March 19, 2008 | posted by Michael Baxter in US economy, rate of interest | comments (0) |

The markets had expected a bigger cut, they had priced in a full percentage point drop, and yet when Mr Bernanke and chums chose to lower rates by a mere 0.75 per cent, there was much celebration.

In proportional terms, it was the biggest fall in interest rates for a very long time.

On Wall Street, and over here, the Fed seemed to be drawing praise. For a while, they had said Ben was asleep at the wheel, in denial over how bad the crisis was – but not any more.

With prices rising, the fear is that deflation could return, and the Fed is pulling out all the stops to avoid that. In Japan, the decade of lost growth was kicked off after the central bank proved itself reluctant to take the measures needed – when finally it lowered interest rates to zero per cent, it was too late.

The Fed wants to avoid those mistakes.

But not everyone at the Fed was so keen to cut rates. Of the ten men and women who voted, two went against the pack, and voted for a more-modest 0.5 per cent cut. The markets didn’t care, Bernanke is their hero, and his earlier reluctance to lower rates forgiven.

Yet, something strange did happen. The long term rate of interest, that’s the rate set by the markets, rose. Some traders at least, appear to believe the Fed has laid down a recipe for inflation – and that in the longer-term, rates will need to rise much higher as a result.

In fact, yesterday also saw a 0.3 per cent rise in producer prices in February – the inflation genie is either knocking very hard on its bottle, or is actually escaping right now.

Previous deep recessions have been caused by falls in asset prices – such was the case in the 1930s, such was the case in Japan in the 1990s. The trick the Fed has to pull off is to allow asset prices to fall to sustainable levels, without setting off a very nasty recession.

If it boosts the economy too much, then it is merely delaying the day and could create even bigger problems in the future.

If it doesn’t boost the economy enough, then it will be very difficult to avoid a downward spiral.

But never lose sight of the fact that the underlying problem in the US is too much spending and not enough saving – the Fed, by cutting rates so much, is delaying the time when this essential readjustment occurs.

Editors footnote

The Japanese recession was in part made much worse because of a refusal amongst banks and authorities to acknowledge how serious the problem was. They were too slow to make their write-downs and too slow to face reality. Judging by all the doom and gloom, that is one criticism at least you can’t level at Wall Street and the City.

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Fed prepares to fire air gun at economic wall

March 18, 2008 | posted by Michael Baxter in US economy | comments (1) |

Today’s the day the Fed seems likely to announce the most spectacular cut in interest rates seen for a very long time. We know rates will fall, that appears to be a given. But how big will the cut be? Judging by its decision to cut the discount rate on a Sunday – an unprecedented step – it seems likely it will be a very big cut indeed, perhaps a full percentage point.

Even more significantly, a growing chorus of voices is now predicting that rates will fall to zero per cent soon. And yet, while the choir of economists sing out their praise, economic gods fall. The mighty dollar, just like Uranus, the grandfather of Zeus, has been castrated. But now, even the heir to the crown, the rate of interest, seems to be confined to the underworld.

In Greek mythology, Zeus rose to pre-eminence after killing his Father, Cronus, who had previously castrated his own Dad. The ruling family of Ancient Greece were clearly a dysfunctional family – but then it appears much can be said about the family of economic policy tools that for so long served us well. The dollar appears to be in freefall, the rate of interest weapon appears to have become blunt, and its yielder, the US Federal Reserve, impotent.

All of a sudden, a nasty word has been dragged out from the economist’s lexicon; recession is old news, all of a sudden it’s the ‘D’ word – Depression. Parallels with 1929 have become the staple diet of press reports.

Yesterday, Michael Taylor, a senior market strategist at Lombard was quoted in the Independent as saying, “We have all been talking about a 1970s-style crisis but as each day goes by this looks more like the 1930s. No one has any clue as to where this is going to end; it’s a self-feeding disaster.”

Recently, Alan Greenspan, a kind of prophet for the old economic gods, warned that we are facing the most serious financial crisis since the Great Depression. It’s all very well making these warnings, but Greenspan himself was really little more than a one trick pony, he was an expert at playing with the rate of interest – but today, it appears that is no longer enough.

For despite the near certainty of a dramatic cut in interest rates today, despite predictions that rates could fall all the way to zero, the gloom seems never ending. The collapse of Bear Stearns is a truly dramatic event – this was a much respected, established symbol of US financial strength.

We are familiar with the arguments to explain the crisis. The banks have stopped trusting each other, they have stopped lending to each other, therefore they will soon stop lending to customers. And why is that? Cut through the crisis, say many commentators, and you will find greed as the main cause of this problem. This morning on the Today programme, for example, a story was told of how one banker did a dodgy deal – but said all he cared about was his bonus.

So perhaps then the problem is that bankers’ remuneration is not appropriate – they are rewarded for short-term gains, regardless of the longer-term implications.

But even that analysis seems to run only skin deep – there is more to this crisis than that.

Again on the Today programme, reference was made to the dotcom crash and how Elliot Spitzer hounded the financial institutions who gave out such bad advice during that period. The prediction goes that we will see a similar pattern again – as the credit ratings agencies and banks find themselves in the full blast of a public backlash.

But parallels with the dotcom crash miss the point. Just as we find Mr Spitzer was no saintly crusader fighting the cause of the oppressed, rather, he was as tainted as were the original crusaders, then the true reality should dawn upon us.

For all its irrationality, the dotcom boom surely laid the foundations of a new economic era – the Internet is transforming business, it’s surely a major factor behind globalisation, and is surely a major reason why we have had such low inflation in recent years. Without the dotcom boom, maybe the global economy would not have expanded anywhere as fast as it has done.

And now it’s time to observe the real truth, the real reason behind this crisis. When we do that, we find that actually there’s an altogether more fascinating, and for the longer term, more optimistic tale. To read this account of the real forces that lie behind this crisis, read the next article.

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The cavalry rides in again

March 12, 2008 | posted by Michael Baxter in UK economy, US economy | comments (0) |

And just as all seemed lost, the sound of a bugle could be heard, and into the melee rode the US cavalry, this time with help from an English regiment headed by Mervyn King, a regiment from the European Central Bank, and from north of the border, the Mounties from the central bank of Canada; even the Swiss lent a hand.

What a relief, central bankers rode in yesterday, and with one deft swing of the riding whip, solved the economic crisis. In all they are pumping in more than $200 billion – well sort of, in the US the Fed has agreed to accept triple-A mortgage debt in exchange for Treasury bonds. The banks will in turn be able borrow against these government-backed bonds from the money markets. It’s a neat trick, the idea is that the Fed can try to restore liquidity without pouring in lots of new cash that could ultimately lead to inflation.

In Blighty, the auctions announced yesterday were a lot more modest. The Old Lady of Threadneedle Street announced two auctions yesterday, one for 18 March, the other for 15 April. In the March auction, £11.35bn will be made available – the extent of the second auction has not been determined yet.

The markets loved the news, and went out and bought. The Dow soared – gaining 406 points – the biggest rise in five years, although, funnily enough, the rise was not big enough to make up for all the losses seen over the previous few days.

In the UK, markets were more circumspect – with the FTSE up a mere 61 points. Across Asia, markets also leapt this morning.

So well done, you central bankers. You have done what Ben once said you should do, and splattered money across the economic landscape as if from a helicopter. Although actually, helicopter Ben stayed on the ground this time – the Fed action was more akin to an airlift, with Ben’s fleet of helicopters taking on a new cargo of debt that the banks don’t want. It’s a good cargo – triple-A rated debt – but if US house prices continue to slide, its weight may yet prove too much for the helicopters carrying it.

The trouble with this action, just like previous moves announced, is that actually the Fed and co can do nothing to solve the underlying problem.

Losses related to subprime are expected to finally come in at $300bn. One economist, Prof Roubini argued in the FT that actually, if US house prices fall by say 10 per cent, then this will be the equivalent of knocking $2,000bn from US household wealth – the equivalent of 14 per cent of GDP.

On the other hand, with the US rate of interest down to 3 per cent, one would have thought that if only the money markets could respond by letting interest rates determined by the markets fall to a similar level, then debt would become a lot more affordable, and house prices would then stabilise.

So that’s the thinking. The danger has to be that the real underlying problem is that asset prices are too high, and factors beyond the control of central banks are causing inflation to rise – that’s the fatal cocktail. Central bankers can only stop house prices from crashing by creating inflationary problems down the line, and when eventually they have to turn their attention to inflation, house prices will probably still be too high. Central banks can paper over the cracks, but the house that Ben and his predecessor Alan built is damp to the core – and no amount of papering can solve that.

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Dow goes into freefall again

March 3, 2008 | posted by Michael Baxter in Markets | comments (0) |

Last week we just couldn’t believe it. The economic news coming out of the US was truly shocking – on Wednesday we headlined, “Is this meltdown for Uncle Sam?” after a stream of economic news painted a picture of real woe.

Yet, what did the markets do while all this bad news was being announced? Well, in the US in particular, instead of making for the nearest tall building, and then preparing to jump, traders went out and celebrated.

For economics news, last Tuesday was something of a black Tuesday – yet the Dow leapt up by over 100 points, and that was on top of a 189 point rise the day before. In fact, by the close of day on Tuesday, the Dow had risen by 400 points in just three working days.

And why were markets so gleeful? Their reasoning went like this. With news that bad, the Fed has got to lower the rate of interest. Three cheers for bad news, it means cheaper borrowing.

In reality, the US has a massive dilemma. Inflation is at 4.2 per cent. Producer price inflation, which can provide a guide to future consumer inflation hit its highest level since 1981 and, of course, the price of oil and wheat are at new all-time highs.

Yet, the Fed is cutting the rate of interest so fast, that its economic scissors must be getting blunt from overuse. US rates have fallen from 5.25 per cent, back in September last year, to just 3 per cent at the time of writing. And now many are predicting further falls to follow, with some saying rates could fall to 2.5 per cent.

This means that the real rate of interest, that’s the rate set by the Fed minus the rate of inflation, is currently minus 1.2 per cent.

On face value, that means it pays to borrow money. You just borrow as much as you can, and let inflation erode the true value of the debt. It also means there is no point in saving, you would be better off spending your money as quickly as it comes in.

In reality, it is not that simple, because interest rates set by the markets are not keeping up with the Fed’s moves. In fact, it’s tempting to say the Fed action is meaningless.

In reality, banks need to attract savers, because they need more money in their electronic vaults to be able to lend out.

So what does the Fed have to do? Before he was chairman of the Fed, Ben Bernanke once made waves when he said the solution to a credit crisis was to scatter money from a helicopter. This earned him the nickname of Helicopter Ben; over the last few months he has been living up to his nickname.

Not literally, of course, but, as an example, on Friday the Fed announced plans to auction another $60bn. The banks won’t lend to each other, so the Fed is lending to them instead. Ben has, in effect, climbed into the metaphorical helicopter and dished out money.

The curious thing though is this. When the economic news was dire, markets soared. Then on Friday, after the Fed announced its latest plan to dish out more money, precisely the kind of thing you would have thought markets wanted, the Dow went into something of a nosedive.

For on Friday, the Dow fell 315 points. Now, there was time a when a fall of 300 points would have been one of the main stories on the national news. Not any more, last year the Dow fell by 300 points or more in one day on no less than five occasions. And it suffered another big fall in January of this year.

Even so, Friday’s fall of 315 points was still pretty dramatic. The Index is now back to the level before the big rises seen at the beginning of last week and the end of the week before.

And if nothing else, it shows just how irrational the markets are.

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The reluctant cut – Bank cuts rates – but dishes out warning

February 8, 2008 | posted by Michael Baxter in rate of interest | comments (3) |

It was a kind of grudging rate cut. Yesterday, the Bank of England knocked another 0.25 per cent off the interest rate – but seemed to be spitting feathers as she did it.

Sure, there seems to be a line-up of economists from here to Timbuktu predicting rates will be slashed this year, and yet the Bank has damning words. “Some slowing of demand growth, by reducing the pressure on capacity, is likely to be necessary to return inflation to target in the medium term.”

The Bank further rattled the inflation cage, saying, “Inflation at 2.1 per cent in December was close to the 2 per cent target, but higher energy and food prices are expected to raise inflation, possibly quite sharply, in the coming months.

“The Committee needs to balance the risk that a sharp slowing in activity pulls inflation below target in the medium-term against the risk that elevated inflation expectations keep inflation above target.”

But while the UK’s central bank still seems to be striking a hawkish note, it’s nothing like the ominous presence of hawks circling above Frankfurt.

Yesterday, the European Central Bank kept rates on hold, and its president Jean Claude Trichet said he was “prepared to act preemptively” in the event of second-round inflationary effects.

It’s all a little odd, because the one place where the central bank doesn’t seem to think inflation is a threat is the place where it is highest.

While in the UK the central bankers worry about inflation of 2.1 per cent, and the in the Eurozone inflation of 3.4 per cent has bankers rattled, in the US, prices rose by 4.1 per cent over the last year.

It seems Ben’s helicopter view of the economic terrain is very different from bankers in London and Frankfurt.

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Markets tumble again – wage inflation drops – is this more like the 1930s than the 1970s?

Ben flies through the sky like a hawk

It’s back, but can we return the inflation genie to its bottle?

Economic snapshot

Ben does it again

Fed digs deeper hole with rate cuts

Fed prepares to fire air gun at economic wall

The cavalry rides in again

Dow goes into freefall again

The reluctant cut – Bank cuts rates – but dishes out warning

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