Showing posts with label crash. Show all posts
Showing posts with label crash. Show all posts
Thursday, 16 July 2020
Sunday, 24 May 2020
Most ingredients are in place for a property crash later this year
Rising unemployment is toxic for the property market and low interest rates may not be enough writes Larry Elliott in The Guardian
Spring is usually the time when the property market comes out of hibernation. Photograph: lucemac/GuardianWitness
This weekend marks the start of a truncated summer house buying season, the moment the residential property market comes out of hibernation.
Normally this happens at Easter but, for obvious reasons, that has not been possible in 2020. Estate agents have been shuttered along with almost every other business, waiting impatiently for the lifting of the lockdown. This bank holiday weekend, with fine weather forecast, provides a chance to make up for lost time.
Well, perhaps. Britain’s love affair with rising house prices borders on the pathological so a mini boom can’t entirely be ruled out. The government did its best last week to give the market a boost by extending its mortgage holiday for the financially distressed for a further three months. That means those having trouble keeping up with their home loans won’t have to make a repayment until at least September.
That said, the notion that this is going to be a year of high turnover and rising house prices is wide of the mark. All the ingredients, bar one, is in place for a crash later in the year.
Let’s start with the obvious: the economy has been poleaxed by the Covid-19 pandemic. The official jobless figures – showing a rise to 2.1 million in claimant count unemployment – provide only a hint of the damage that has been caused to the labour market by the lockdown. A truer picture comes from the number of jobs furloughed under the Treasury’s wage subsidy scheme, which stands at 8m and counting.
Not every one of those furloughed workers is going to end up jobless, but some of them will. The number will depend, crucially, on how long it takes for the economy to return to something like normal. The slower the process the more businesses will close permanently.
Rishi Sunak announced earlier this month that the furloughing scheme will be kept going until the end of October, but from the start of August employers will be asked to foot part of the wage bill themselves. At present, the government is paying 80% of wages up to a monthly maximum of £2,500, an expensive commitment that helps explain why the state borrowed almost as much in April (£62bn) as in the whole of the last financial year.
The chancellor will announce in the next few days how big a contribution employers will need to make, but at a minimum they can expect to pay 20% of an employee’s wages. This will be the moment of truth for many businesses.
Rising unemployment is toxic for the property market. If people struggle to find another job quickly after losing their job they fall into mortgage arrears and eventually have their homes repossessed. That happened in the early 1990s and is one reason why a mortgage holiday has been introduced this time.
Hansen Lu, property economist at Capital Economics, has shown how a moratorium on home loan payments saves someone paying 2.5% on a £200,000 mortgage £5,400 over a six-month period. That’s quite a financial cushion because although the lender eventually has to be paid back, it means subsequent mortgage payments go up by about £30 a month.
Again, everything depends on the state of the labour market this autumn. The mortgage holiday will end at the same time as the furlough scheme, and already there will be many households who will be wondering how they will manage at that point.
Buying a house is the single biggest financial commitment most of us ever make. When people are deciding whether to buy or not, they think hard about whether they are going to be able to keep up the monthly payments. It is not just being unemployed that matters; it is the threat of unemployment. Surveys suggest, hardly surprisingly, that consumers are extremely wary of committing to big-ticket items.
Only one thing is missing from a perfect storm: sharply rising interest rates. A doubling of official interest rates was the trigger for recession and record home repossessions in the early 1990s, but there is not the slightest prospect of that happening this time. The Bank of England has cut interest rates to 0.1% and is debating whether to take them negative.
There are economists – the monetarist Tim Congdon, for example – who believe that the vast quantities of money the Bank is chucking at the economy will eventually lead to much higher inflation. In those circumstances Threadneedle Street would have a choice: raise interest rates aggressively to hit the government’s 2% inflation target and guarantee deep recession in the process; or go easy. If it chooses the first option the housing market will collapse because many owner occupiers can only service the debts they have had to to incur to afford expensive real estate if interest rates remain at historically low levels.
So here’s how things stack up. On the one hand, the economy has collapsed and is recovering only falteringly; unemployment, whether real or hidden by the furlough, is rocketing; incomes are being squeezed; consumer confidence is at a low ebb; and the ratio of house prices to earnings is high. On the other hand, interest rates are low and will stay low for some time. In the jargon of the economics profession, there are more downside than upside risks.
But let me personalise things a bit. A relative for whom I hold power of attorney is about to have his house put on the market to fund his care home fees. My intention is to take the first halfway decent offer that’s received, because my sense is that prices are heading lower. In the past I haven’t heeded my own advice and lived to regret it. Not this time, though.
This weekend marks the start of a truncated summer house buying season, the moment the residential property market comes out of hibernation.
Normally this happens at Easter but, for obvious reasons, that has not been possible in 2020. Estate agents have been shuttered along with almost every other business, waiting impatiently for the lifting of the lockdown. This bank holiday weekend, with fine weather forecast, provides a chance to make up for lost time.
Well, perhaps. Britain’s love affair with rising house prices borders on the pathological so a mini boom can’t entirely be ruled out. The government did its best last week to give the market a boost by extending its mortgage holiday for the financially distressed for a further three months. That means those having trouble keeping up with their home loans won’t have to make a repayment until at least September.
That said, the notion that this is going to be a year of high turnover and rising house prices is wide of the mark. All the ingredients, bar one, is in place for a crash later in the year.
Let’s start with the obvious: the economy has been poleaxed by the Covid-19 pandemic. The official jobless figures – showing a rise to 2.1 million in claimant count unemployment – provide only a hint of the damage that has been caused to the labour market by the lockdown. A truer picture comes from the number of jobs furloughed under the Treasury’s wage subsidy scheme, which stands at 8m and counting.
Not every one of those furloughed workers is going to end up jobless, but some of them will. The number will depend, crucially, on how long it takes for the economy to return to something like normal. The slower the process the more businesses will close permanently.
Rishi Sunak announced earlier this month that the furloughing scheme will be kept going until the end of October, but from the start of August employers will be asked to foot part of the wage bill themselves. At present, the government is paying 80% of wages up to a monthly maximum of £2,500, an expensive commitment that helps explain why the state borrowed almost as much in April (£62bn) as in the whole of the last financial year.
The chancellor will announce in the next few days how big a contribution employers will need to make, but at a minimum they can expect to pay 20% of an employee’s wages. This will be the moment of truth for many businesses.
Rising unemployment is toxic for the property market. If people struggle to find another job quickly after losing their job they fall into mortgage arrears and eventually have their homes repossessed. That happened in the early 1990s and is one reason why a mortgage holiday has been introduced this time.
Hansen Lu, property economist at Capital Economics, has shown how a moratorium on home loan payments saves someone paying 2.5% on a £200,000 mortgage £5,400 over a six-month period. That’s quite a financial cushion because although the lender eventually has to be paid back, it means subsequent mortgage payments go up by about £30 a month.
Again, everything depends on the state of the labour market this autumn. The mortgage holiday will end at the same time as the furlough scheme, and already there will be many households who will be wondering how they will manage at that point.
Buying a house is the single biggest financial commitment most of us ever make. When people are deciding whether to buy or not, they think hard about whether they are going to be able to keep up the monthly payments. It is not just being unemployed that matters; it is the threat of unemployment. Surveys suggest, hardly surprisingly, that consumers are extremely wary of committing to big-ticket items.
Only one thing is missing from a perfect storm: sharply rising interest rates. A doubling of official interest rates was the trigger for recession and record home repossessions in the early 1990s, but there is not the slightest prospect of that happening this time. The Bank of England has cut interest rates to 0.1% and is debating whether to take them negative.
There are economists – the monetarist Tim Congdon, for example – who believe that the vast quantities of money the Bank is chucking at the economy will eventually lead to much higher inflation. In those circumstances Threadneedle Street would have a choice: raise interest rates aggressively to hit the government’s 2% inflation target and guarantee deep recession in the process; or go easy. If it chooses the first option the housing market will collapse because many owner occupiers can only service the debts they have had to to incur to afford expensive real estate if interest rates remain at historically low levels.
So here’s how things stack up. On the one hand, the economy has collapsed and is recovering only falteringly; unemployment, whether real or hidden by the furlough, is rocketing; incomes are being squeezed; consumer confidence is at a low ebb; and the ratio of house prices to earnings is high. On the other hand, interest rates are low and will stay low for some time. In the jargon of the economics profession, there are more downside than upside risks.
But let me personalise things a bit. A relative for whom I hold power of attorney is about to have his house put on the market to fund his care home fees. My intention is to take the first halfway decent offer that’s received, because my sense is that prices are heading lower. In the past I haven’t heeded my own advice and lived to regret it. Not this time, though.
Saturday, 25 April 2020
Sunday, 22 March 2020
Wartime finance fit for wartime economic conditions. Sunak as British Prime Minister?
Rishi Sunak’s coronavirus rescue package is crucial for a collapsing economy. Social partnership is back writes Will Hutton in The Guardian
Food queues at Covent Garden market in London during the Second World War. Photograph: Trinity Mirror/Mirrorpix/Alamy Stock Photo
Last week, the British economic and financial system came very close to breakdown. An extraordinary number of companies were, and are, in acute financial distress, threatening mass lay-offs and the cessation of swathes of economic activity. There was an almost complete collapse in investor confidence, with attempts to sell every financial asset – even high-quality government bonds – in a desperate quest to hold cash. Such was the loss of generalised faith in the integrity of the system that the governor of the Bank of England, Andrew Bailey, came close to shutting the financial markets.
The scale of the incredible drama – much more acute than the financial crisis of September 2008 and still unfolding – only commanded half our attention. Most eyes understandably were focused on the march of the coronavirus and the missteps and miscommunications of a prime minister unsuited for the leadership demands of high office.
The confusion and growing public panic at the uncertain response was amplified manyfold in the financial markets, matched by fear and uncertainty in the real economy that produces the goods and services we want and need. The Treasury and the Bank of England stared into an abyss. Thankfully their officials, derided by the cabal of second-rate ideologue advisers at Number 10, were up to the task.
Here Boris Johnson – and the country – got lucky. The Conservative party, broken by the triumph of anti-EU ideology and the wilful disregard for fact that is the hallmark of the Brexiter mindset, now offers the weakest talent pool in its long history. But the chancellor, Rishi Sunak, is an unexpected outlier. Officials report that he is proving highly intelligent, economically literate, agile and with acutely sensitive political antennae. Thus the unprecedented interventions last week – with much more to come in the weeks ahead.
Even as I write, the Treasury and the Bank are in urgent talks to organise bailout packages for a number of top companies (including, but not only, airlines), sometimes taking government share stakes along the lines of the bailout of RBS in 2008.
But it was only last Monday that the government genuinely thought that if it stood behind business with a massive programme of soft loans, with grants for hard-hit sectors, it might escape without having to go much further. It did not need to sully its hands with un-Tory propositions – underwriting worker incomes together with improved benefits for those thrown out of work.
However, the crisis of confidence in the financial markets and intense lobbying by the CBI and the TUC soon changed minds, none faster than the initially sceptical Sunak. After all, business cannot prosper without buyers for its products: the good health and predictable incomes of the working population are vital. The last vestiges of Thatcherite individualism are being torched. Social partnership is back with a vengeance
Meanwhile, the top echelons of the Bank of England witnessed the consequences of the outbreak as mounting panic in global trading hit British markets badly, all magnified by Johnson’s bumbles. The sterling crisis expected with a no-deal Brexit was brought forward: a currency dependent on the “kindness of strangers”, given the scale of Britain’s monumental international balance of payments deficit, was in near freefall. There had to be a twin response: a fiscal one that “would blow the bloody wall down” and a shock-and-awe monetary intervention to try to steady shattered bond markets.
The Bank moved first, committing to a £200bn programme of printing money to buy bonds (quantitative easing) and cutting interest rates to a symbolic 0.1%. For the moment, the markets have steadied. Then came Sunak’s measures, the centrepiece of which was the commitment to pay 80% of the wages (up to £2,500 a month) of workers threatened by lay-off. He also ratcheted up support for renters and those on universal credit.
Two million people working in the now shut hospitality sector will be immediately eligible, along with up to five million more as the economy contracts by at least one fifth in the months ahead, with the expected package for the self-employed adding yet more. At its peak, the cost per month will exceed £25bn and the scheme will plainly need extending. The budget deficit in 2020-21 will comfortably exceed £200bn, to be financed, if necessary, by the Bank of England printing money. There are no other options. One privy to the policy told me that even at the last they were unsure whether Sunak “had the balls”. He did. It is what had to be done – and is being reproduced across Europe and North America.
It is wartime finance for wartime economic conditions. Over and above the multiple bailout packages currently being negotiated will come state direction and manufacture of vaccines, key medical products, respirators, and the takeover of private hospitals. Key workers – in the NHS, police, transport and food supply chain – will have to be marshalled in their millions and their wellbeing and health protected. Rationing of key foodstuffs will need to be imposed. The only way to head off a full-scale collapse of sterling and protracted economic depression will be to defer Brexit for at least a year or, as one source told me, five years. Government communications will have to be infinitely more sure-footed. The government itself has to be 100% trusted.
The open question is whether Johnson’s government, with its “frighteningly weak” core at Number 10, as one insider reported to me, can do what is necessary. If not there will, as in wartime, have to be a national government (headed by Sunak with Keir Starmer as his deputy). Johnson is too divisive a figure, too thin-skinned, too unserious in his messaging and with too divisive a history, to lead.
Sunak and Starmer offer competence and humanity above ideology. Whether through the deferral of Brexit or smart and well-thought-through state direction of the economy, they will do what is needed to get us through. In the meantime, take social distancing seriously. Be one of those who put society and social obligations first. And stay safe.
Last week, the British economic and financial system came very close to breakdown. An extraordinary number of companies were, and are, in acute financial distress, threatening mass lay-offs and the cessation of swathes of economic activity. There was an almost complete collapse in investor confidence, with attempts to sell every financial asset – even high-quality government bonds – in a desperate quest to hold cash. Such was the loss of generalised faith in the integrity of the system that the governor of the Bank of England, Andrew Bailey, came close to shutting the financial markets.
The scale of the incredible drama – much more acute than the financial crisis of September 2008 and still unfolding – only commanded half our attention. Most eyes understandably were focused on the march of the coronavirus and the missteps and miscommunications of a prime minister unsuited for the leadership demands of high office.
The confusion and growing public panic at the uncertain response was amplified manyfold in the financial markets, matched by fear and uncertainty in the real economy that produces the goods and services we want and need. The Treasury and the Bank of England stared into an abyss. Thankfully their officials, derided by the cabal of second-rate ideologue advisers at Number 10, were up to the task.
Here Boris Johnson – and the country – got lucky. The Conservative party, broken by the triumph of anti-EU ideology and the wilful disregard for fact that is the hallmark of the Brexiter mindset, now offers the weakest talent pool in its long history. But the chancellor, Rishi Sunak, is an unexpected outlier. Officials report that he is proving highly intelligent, economically literate, agile and with acutely sensitive political antennae. Thus the unprecedented interventions last week – with much more to come in the weeks ahead.
Even as I write, the Treasury and the Bank are in urgent talks to organise bailout packages for a number of top companies (including, but not only, airlines), sometimes taking government share stakes along the lines of the bailout of RBS in 2008.
But it was only last Monday that the government genuinely thought that if it stood behind business with a massive programme of soft loans, with grants for hard-hit sectors, it might escape without having to go much further. It did not need to sully its hands with un-Tory propositions – underwriting worker incomes together with improved benefits for those thrown out of work.
However, the crisis of confidence in the financial markets and intense lobbying by the CBI and the TUC soon changed minds, none faster than the initially sceptical Sunak. After all, business cannot prosper without buyers for its products: the good health and predictable incomes of the working population are vital. The last vestiges of Thatcherite individualism are being torched. Social partnership is back with a vengeance
Meanwhile, the top echelons of the Bank of England witnessed the consequences of the outbreak as mounting panic in global trading hit British markets badly, all magnified by Johnson’s bumbles. The sterling crisis expected with a no-deal Brexit was brought forward: a currency dependent on the “kindness of strangers”, given the scale of Britain’s monumental international balance of payments deficit, was in near freefall. There had to be a twin response: a fiscal one that “would blow the bloody wall down” and a shock-and-awe monetary intervention to try to steady shattered bond markets.
The Bank moved first, committing to a £200bn programme of printing money to buy bonds (quantitative easing) and cutting interest rates to a symbolic 0.1%. For the moment, the markets have steadied. Then came Sunak’s measures, the centrepiece of which was the commitment to pay 80% of the wages (up to £2,500 a month) of workers threatened by lay-off. He also ratcheted up support for renters and those on universal credit.
Two million people working in the now shut hospitality sector will be immediately eligible, along with up to five million more as the economy contracts by at least one fifth in the months ahead, with the expected package for the self-employed adding yet more. At its peak, the cost per month will exceed £25bn and the scheme will plainly need extending. The budget deficit in 2020-21 will comfortably exceed £200bn, to be financed, if necessary, by the Bank of England printing money. There are no other options. One privy to the policy told me that even at the last they were unsure whether Sunak “had the balls”. He did. It is what had to be done – and is being reproduced across Europe and North America.
It is wartime finance for wartime economic conditions. Over and above the multiple bailout packages currently being negotiated will come state direction and manufacture of vaccines, key medical products, respirators, and the takeover of private hospitals. Key workers – in the NHS, police, transport and food supply chain – will have to be marshalled in their millions and their wellbeing and health protected. Rationing of key foodstuffs will need to be imposed. The only way to head off a full-scale collapse of sterling and protracted economic depression will be to defer Brexit for at least a year or, as one source told me, five years. Government communications will have to be infinitely more sure-footed. The government itself has to be 100% trusted.
The open question is whether Johnson’s government, with its “frighteningly weak” core at Number 10, as one insider reported to me, can do what is necessary. If not there will, as in wartime, have to be a national government (headed by Sunak with Keir Starmer as his deputy). Johnson is too divisive a figure, too thin-skinned, too unserious in his messaging and with too divisive a history, to lead.
Sunak and Starmer offer competence and humanity above ideology. Whether through the deferral of Brexit or smart and well-thought-through state direction of the economy, they will do what is needed to get us through. In the meantime, take social distancing seriously. Be one of those who put society and social obligations first. And stay safe.
Tuesday, 25 August 2015
Why is China's stock market falling and how might it affect the global economy?
Katie Allen in The Guardian
What has happened in China?
China’s stock market has fallen sharply over recent weeks despite measures by officials in Beijing aimed at calming investors’ jitters and shoring up global confidence in the country’s slowing economy.
Shares in China had soared 150% in the 12 months to mid-June as individual investors piled into the rising market, often borrowing heavily to do so. But chiming with warnings that shares were overvalued and the signs of an economic slowdown, the momentum came to a shuddering halt when shares hit a seven-year peak.
Following another plunge on what was dubbed “Black Monday”, China’s stock markets have now given up all their gains for the year.
China’s shock move to devalue its currency, the yuan, this month only served to intensify worries about the world’s second-largest economy.
Shares around the world followed China’s stock markets lower. About £74bn was wiped off the value of the FTSE 100 and on Wall Street, the Dow Jones Industrial Average slumped by a record of more than 1,000 points at one stage.
Commodities such as crude oil and copper have also tumbled to multi-year lows as investors take fright over signs of waning demand in the world’s leading consumer of raw materials.
The currencies of emerging Asian economies have weakened as investors drop those assets seen as riskier to hold. But investments perceived as safe havens in times of trouble, such as gold and some government bonds, are in demand.
Is this a repeat of the 2008 global financial crisis?
Some of the falls on stock markets are certainly reminiscent of the swings seen around the time of the collapse of the US bank Lehman Brothers. The FTSEurofirst 300, a pan-European share index, suffered its biggest one-day drop since late 2008, losing 5.4%. For Shanghai’s composite index, Monday’s 8.5% slump was the biggest since February 2007.
But some economists say the parallels stop there. They see limited risk to China’s real economy from the stock market turmoil and little to be worried about beyond China.
Julian Jessop, the chief global economist at the consultancy Capital Economics, said: “The current panic is essentially ‘made in China’. The recent data from other major economies, including the US, eurozone and Japan, has generally been good ... Aside from the bad news from China, there is very little to support fears of a major global downturn.”
But others are less sanguine. They point out that China’s slowdown is just one of many factors worrying investors alongside lingering political problems in the eurozone, signs of weaker global growth and vast sums flowing out of fragile emerging markets such as Brazil. Furthermore, policymakers apparently have few tools left to help.
Should I be worried?
George Osborne, the UK chancellor, suggests not and believes China’s stock market woes will not have much impact on European economies.
But there are plenty of other voices saying this could get a lot worse.
What if I have money tied up in stocks?
Individuals with money invested in shares should not worry too much for now, financial market experts have said.
Nick Dixon, an investment director at the asset management company Aegon UK, said: “If pension savers don’t need to access their fund for many years, they needn’t be alarmed by short term volatility.
“Stock markets are in for a bumpy ride over the coming weeks, but if savers can stomach the ups and downs, equities are likely to provide superior returns over the medium and long term.”
What does it mean for interest rates?
There had been widespread expectation that the US Federal Reserve would start the gradual process of hiking interest rates as soon as next month. Signs of a potential hard landing for China could well stay the central bank’s hand.
The same goes for the UK, where the Bank of England governor, Mark Carney, recently hinted that a rate hike could happen around the turn of the year.
In China, meanwhile, the country’s central bank is widely expected to ease monetary policy further to shore up growth and confidence.
What will this mean for inflation?
A silver lining economists highlight for those countries that rely on imports of oil and other commodities is that this global sell-off will keep prices low. Oil has more than halved from a peak of $115 per barrel last summer to a Brent crude price of less than $44 per barrel now. At least some of that will be passed on to drivers in lower fuel prices.
Philippe Waechter, the global chief economist at Natixis Asset Management, said: “On the upside, the fall in the oil price will be positive news for European economies as consumer purchasing power will be increased.”
What happens next?
Officials in Beijing are under pressure to step in with more measures to restore stability to China’s stock markets. The trouble they face is that every action is also perceived as a further sign of quite how worried they are about the slide in shares and the wider economy.
Bill O’Neill, the head of the UK investment office at UBS Wealth Management, said: “There will be some form of additional stimulus over the next few days and weeks.
“That is likely to be combined with supportive words from developed economy central bankers aimed at offering reassurance that accommodative policies will remain in place regardless of when interest rates start to rise.”
From Thursday, investors will be looking to the US and a symposium of central bankers in Jackson Hole, Wyoming, for signs of how this new bout of market volatility may influence their interest rate decisions.
What has happened in China?
China’s stock market has fallen sharply over recent weeks despite measures by officials in Beijing aimed at calming investors’ jitters and shoring up global confidence in the country’s slowing economy.
Shares in China had soared 150% in the 12 months to mid-June as individual investors piled into the rising market, often borrowing heavily to do so. But chiming with warnings that shares were overvalued and the signs of an economic slowdown, the momentum came to a shuddering halt when shares hit a seven-year peak.
Following another plunge on what was dubbed “Black Monday”, China’s stock markets have now given up all their gains for the year.
China’s shock move to devalue its currency, the yuan, this month only served to intensify worries about the world’s second-largest economy.
Shares around the world followed China’s stock markets lower. About £74bn was wiped off the value of the FTSE 100 and on Wall Street, the Dow Jones Industrial Average slumped by a record of more than 1,000 points at one stage.
Commodities such as crude oil and copper have also tumbled to multi-year lows as investors take fright over signs of waning demand in the world’s leading consumer of raw materials.
The currencies of emerging Asian economies have weakened as investors drop those assets seen as riskier to hold. But investments perceived as safe havens in times of trouble, such as gold and some government bonds, are in demand.
Is this a repeat of the 2008 global financial crisis?
Some of the falls on stock markets are certainly reminiscent of the swings seen around the time of the collapse of the US bank Lehman Brothers. The FTSEurofirst 300, a pan-European share index, suffered its biggest one-day drop since late 2008, losing 5.4%. For Shanghai’s composite index, Monday’s 8.5% slump was the biggest since February 2007.
But some economists say the parallels stop there. They see limited risk to China’s real economy from the stock market turmoil and little to be worried about beyond China.
Julian Jessop, the chief global economist at the consultancy Capital Economics, said: “The current panic is essentially ‘made in China’. The recent data from other major economies, including the US, eurozone and Japan, has generally been good ... Aside from the bad news from China, there is very little to support fears of a major global downturn.”
But others are less sanguine. They point out that China’s slowdown is just one of many factors worrying investors alongside lingering political problems in the eurozone, signs of weaker global growth and vast sums flowing out of fragile emerging markets such as Brazil. Furthermore, policymakers apparently have few tools left to help.
Should I be worried?
George Osborne, the UK chancellor, suggests not and believes China’s stock market woes will not have much impact on European economies.
But there are plenty of other voices saying this could get a lot worse.
Larry Summers, the former US Treasury secretary, has suggested that the US Federal Reserve may be forced to ease monetary policy, rather than hiking interest rates in the next few months as had been expected.
— Lawrence H. Summers (@LHSummers)August 24, 2015
As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation.
— Lawrence H. Summers (@LHSummers)August 24, 2015
It is far from clear that the next Fed move will be a tightening.
Furthermore, experts say policymakers do not have many tools available to shore up the global economy this time around.
Interest rates are already at record lows and central banks have spent years printing electronic cash in quantitative easing (QE) programmes, cheap money that many blame for the latest market troubles.
Stephen King, the HSBC economist, warned back in May: “The world economy is sailing across the ocean without any lifeboats to use in case of emergency.”
Damian McBride, Gordon Brown’s former spin doctor, spelled out his advice for an impending crash on Twitter.
— Damian McBride (@DPMcBride)August 24, 2015
Advice on the looming crash, No.1: get hard cash in a safe place now; don't assume banks & cashpoints will be open, or bank cards will work.
— Damian McBride (@DPMcBride)August 24, 2015
Crash advice No.2: do you have enough bottled water, tinned goods & other essentials at home to live a month indoors? If not, get shopping.
— Damian McBride (@DPMcBride)August 24, 2015
Crash advice No.3: agree a rally point with your loved ones in case transport and communication gets cut off; somewhere you can all head to.
Another tweet posted later on Monday:
— Damian McBride (@DPMcBride)August 24, 2015
Today is just the stock market catching up with the terror over defaults that's been gripping the bond market for months.
— Lawrence H. Summers (@LHSummers)August 24, 2015
As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation.
— Lawrence H. Summers (@LHSummers)August 24, 2015
It is far from clear that the next Fed move will be a tightening.
Furthermore, experts say policymakers do not have many tools available to shore up the global economy this time around.
Interest rates are already at record lows and central banks have spent years printing electronic cash in quantitative easing (QE) programmes, cheap money that many blame for the latest market troubles.
Stephen King, the HSBC economist, warned back in May: “The world economy is sailing across the ocean without any lifeboats to use in case of emergency.”
Damian McBride, Gordon Brown’s former spin doctor, spelled out his advice for an impending crash on Twitter.
— Damian McBride (@DPMcBride)August 24, 2015
Advice on the looming crash, No.1: get hard cash in a safe place now; don't assume banks & cashpoints will be open, or bank cards will work.
— Damian McBride (@DPMcBride)August 24, 2015
Crash advice No.2: do you have enough bottled water, tinned goods & other essentials at home to live a month indoors? If not, get shopping.
— Damian McBride (@DPMcBride)August 24, 2015
Crash advice No.3: agree a rally point with your loved ones in case transport and communication gets cut off; somewhere you can all head to.
Another tweet posted later on Monday:
— Damian McBride (@DPMcBride)August 24, 2015
Today is just the stock market catching up with the terror over defaults that's been gripping the bond market for months.
What if I have money tied up in stocks?
Individuals with money invested in shares should not worry too much for now, financial market experts have said.
Nick Dixon, an investment director at the asset management company Aegon UK, said: “If pension savers don’t need to access their fund for many years, they needn’t be alarmed by short term volatility.
“Stock markets are in for a bumpy ride over the coming weeks, but if savers can stomach the ups and downs, equities are likely to provide superior returns over the medium and long term.”
What does it mean for interest rates?
There had been widespread expectation that the US Federal Reserve would start the gradual process of hiking interest rates as soon as next month. Signs of a potential hard landing for China could well stay the central bank’s hand.
The same goes for the UK, where the Bank of England governor, Mark Carney, recently hinted that a rate hike could happen around the turn of the year.
In China, meanwhile, the country’s central bank is widely expected to ease monetary policy further to shore up growth and confidence.
What will this mean for inflation?
A silver lining economists highlight for those countries that rely on imports of oil and other commodities is that this global sell-off will keep prices low. Oil has more than halved from a peak of $115 per barrel last summer to a Brent crude price of less than $44 per barrel now. At least some of that will be passed on to drivers in lower fuel prices.
Philippe Waechter, the global chief economist at Natixis Asset Management, said: “On the upside, the fall in the oil price will be positive news for European economies as consumer purchasing power will be increased.”
What happens next?
Officials in Beijing are under pressure to step in with more measures to restore stability to China’s stock markets. The trouble they face is that every action is also perceived as a further sign of quite how worried they are about the slide in shares and the wider economy.
Bill O’Neill, the head of the UK investment office at UBS Wealth Management, said: “There will be some form of additional stimulus over the next few days and weeks.
“That is likely to be combined with supportive words from developed economy central bankers aimed at offering reassurance that accommodative policies will remain in place regardless of when interest rates start to rise.”
From Thursday, investors will be looking to the US and a symposium of central bankers in Jackson Hole, Wyoming, for signs of how this new bout of market volatility may influence their interest rate decisions.
Wednesday, 19 November 2014
Economic Growth: the destructive god that can never be appeased
The blind pursuit of economic exapansion stokes a cycle of financial crisis, and is wrecking our world. Time for an alternative
Another crash is coming. We all know it, now even David Cameron acknowledges it. The only questions are what the immediate catalyst will be, and when it begins.
You can take your pick. The Financial Times reported yesterday that China now resembles the US in 2007. Domestic bank loans have risen 40% since 2008, while “the ability to repay that debt has deteriorated dramatically”. Property prices are falling and the companies that run China’s shadow banking system provide “virtually no disclosure” of their liabilities. Just two days ago the G20 leaders announced that growth in China “is robust and is becoming more sustainable”. You can judge the value of their assurances for yourself.
Housing bubbles in several countries, including Britain, could pop any time. A report in September revealed that total world debt (public and private) is 212% of GDP. In 2008, when it helped cause the last crash, it stood at 174%. The Telegraph notes that this threatens to cause “renewed financial crisis … and eventual mass default”. Shadow banking has gone beserk, stocks appear to be wildly overvalued, the eurozone is bust again. Which will blow first?
Or perhaps it’s inaccurate to describe this as another crash. Perhaps it’s a continuation of the last one, the latest phase in a permanent cycle of crisis exacerbated by the measures (credit bubbles, deregulation, the curtailment of state spending) that were supposed to deliver uninterrupted growth. The system the world’s governments have sought to stabilise is inherently unstable; built on debt, fuelled by speculation, run by sharks.
If it goes down soon, as Cameron fears, in a world of empty coffers and hobbled public services it will precipitate an ideological crisis graver than the blow to Keynesianism in the 1970s. The problem that then arises – and which explains the longevity of the discredited ideology that caused the last crash – is that there is no alternative policy, accepted by mainstream political parties, with which to replace it. They will keep making the same mistakes, while expecting a different outcome.
To try to stabilise this system, governments behave like soldiers billeted in an ancient manor, burning the furniture, the paintings and the stairs to keep themselves warm for a night. They are breaking up the postwar settlement, our public health services and social safety nets, above all the living world, to produce ephemeral spurts of growth. Magnificent habitats, the benign and fragile climate in which we have prospered, species that have lived on earth for millions of years – all are being stacked on to the fire, their protection characterised as an impediment to growth.
Cameron boasted on Monday that he will revive the economy by “scrapping red tape”. This “red tape” consists in many cases of the safeguards defending both people and places from predatory corporations. The small business, enterprise and employment bill is now passing through the House of Commons – spinelessly supported, as ever, by Labour. The bill seeks to pull down our protective rules to “reduce costs for business”, even if that means increasing costs for everyone else, while threatening our health and happiness. But why? As the government boasted last week, the UK already has “the least restrictive product market regulation and the most supportive regulatory and institutional environment for business across the G20.” And it still doesn’t work. So let’s burn what remains.
This bonfire of regulation is accompanied by a reckless abandonment of democratic principles. In the Commons on Monday, Cameron spoke for the first time about the Transatlantic Trade and Investment Partnership (TTIP). If this treaty between the EU and the US goes ahead, it will grant corporations a separate legal system to which no one else has access, through which they can sue governments passing laws that might affect their profits. Cameron insisted that “it does not in any way have to affect our national health service”. (Note those words “have to”.) Pressed to explain this, he cited the former EU trade commissioner, who claimed that “public services are always exempted”.
But I have read the EU’s negotiating mandate, and it contains no such exemption, just plenty of waffle and ambiguity on this issue. When the Scottish government asked Cameron’s officials for an “unequivocal assurance” that the NHS would not be exposed to such litigation, they refused to provide it. This treaty could rip our public services to shreds for the sake of a short and (studies suggest) insignificant fizzle of economic growth.
Is it not time to think again? To stop sacrificing our working lives, our prospects, our surroundings to an insatiable God? To consider a different economic model, which does not demand endless pain while generating repeated crises?
Amazingly, this consideration begins on Thursday. For the first time in 170 years, parliament will debate one aspect of the problem: the creation of money. Few people know that 97% of our money supply is created not by the government (or the central bank), but by commercial banks in the form of loans. At no point was a democratic decision made to allow them to do this. So why do we let it happen? This, as Martin Wolf has explained in the Financial Times, “is the source of much of the instability of our economies”. The debate won’t stop the practice, but it represents the raising of a long-neglected question.
This, though, is just the beginning. Is it not also time for a government commission on post-growth economics? Drawing on the work of thinkers such as Herman Daly, Tim Jackson, Peter Victor, Kate Raworth, Rob Dietz and Dan O’Neill, it would look at the possibility of moving towards a steady state economy: one that seeks distribution rather than blind expansion; that does not demand infinite growth on a finite planet.
It would ask the question that never gets asked: why? Why are we wrecking the natural world and public services to generate growth, when that growth is not delivering contentment, security or even, for most of us, greater prosperity? Why have we enthroned growth, regardless of its utility, above all other outcomes? Why, despite failures so great and so frequent, have we not changed the model? When the next crash comes, these questions will be inescapable.
Monday, 24 March 2014
Did Hyman Minsky find the secret behind financial crashes?
American economist Hyman Minsky, who died in 1996, grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented, writes Duncan Weldon.
Minsky spent his life on the margins of economics but his ideas suddenly gained currency with the 2007-08 financial crisis. To many, it seemed to offer one of the most plausible accounts of why it had happened.
His long out-of-print books were suddenly in high demand with copies changing hands for hundreds of dollars - not bad for densely written tomes with titles like Stabilizing an Unstable Economy.
Senior central bankers including current US Federal Reserve chair Janet Yellen and the Bank of England's Mervyn King began quoting his insights. Nobel Prize-winning economist Paul Krugman named a high profile talk about the financial crisis The Night They Re-read Minsky.
Here are five of his ideas.
Stability is destabilising
Minsky's main idea is so simple that it could fit on a T-shirt, with just three words: "Stability is destabilising."
Most macroeconomists work with what they call "equilibrium models" - the idea is that a modern market economy is fundamentally stable. That is not to say nothing ever changes but it grows in a steady way.
To generate an economic crisis or a sudden boom some sort of external shock has to occur - whether that be a rise in oil prices, a war or the invention of the internet.
Minsky disagreed. He thought that the system itself could generate shocks through its own internal dynamics. He believed that during periods of economic stability, banks, firms and other economic agents become complacent.
They assume that the good times will keep on going and begin to take ever greater risks in pursuit of profit. So the seeds of the next crisis are sown in the good time.
Three stages of debt
Minsky had a theory, the "financial instability hypothesis", arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi.
In the first stage, soon after a crisis, banks and borrowers are cautious. Loans are made in modest amounts and the borrower can afford to repay both the initial principal and the interest.
As confidence rises banks begin to make loans in which the borrower can only afford to pay the interest. Usually this loan is against an asset which is rising in value. Finally, when the previous crisis is a distant memory, we reach the final stage - Ponzi finance. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. Again this is underpinned by a belief that asset prices will rise.
The easiest way to understand is to think of a typical mortgage. Hedge finance means a normal capital repayment loan, speculative finance is more akin to an interest-only loan and then Ponzi finance is something beyond even this. It is like getting a mortgage, making no payments at all for a few years and then hoping the value of the house has gone up enough that its sale can cover the initial loan and all the missed payments. You can see that the model is a pretty good description of the kind of lending that led to the financial crisis.
Minsky moments
The "Minsky moment", a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices.
It is like the moment that a cartoon character runs off a cliff. They keep on running for a while, still believing they're on solid ground. But then there's a moment of sudden realisation - the Minsky moment - when they look down and see nothing but thin air. Then they plummet to the ground, and that's the crisis and crash of 2008.
Finance matters
Until fairly recently, most macroeconomists were not very interested in the finer details of the banking and financial system. They saw it as just an intermediary which moved money from savers to borrowers.
This is rather like the way most people are not very interested in the finer details of plumbing when they're having a shower. As long as the pipes are working and the water is flowing there is no need to understand the detailed workings.
To Minsky, banks were not just pipes but more like a pump - not just simple intermediaries moving money through the system but profit-making institutions, with an incentive to increase lending. This is part of the mechanism that makes economies unstable.
Preferring words to maths and models
Since World War Two, mainstream economics has become increasingly mathematical, based on formal models of how the economy works.
To model things you need to make assumptions, and critics of mainstream economics argue that as the models and maths became more and more complex, the assumptions underpinning them became more and more divorced from reality. The models became an end in themselves.
Although he trained in mathematics, Minsky preferred what economists call a narrative approach - he was about ideas expressed in words. Many of the greats from Adam Smith to John Maynard Keynes to Friedrich Hayek worked like this.
While maths is more precise, words might allow you to express and engage with complex ideas that are tricky to model - things like uncertainty, irrationality, and exuberance. Minsky's fans say this contributed to a view of the economy that was far more "realistic" than that of mainstream economics.
Saturday, 31 August 2013
Another financial crisis looms if rich countries can't kick their addiction to cash injection
Five years on from the last crash, quantitative easing remains the weapon of choice for governments unwilling to challenge the current economic model
Illustration by Matthew Richardson
Just as people started to think that things were getting calmer – if not exactly brighter – in the rich countries, things have become decidedly slower and more volatile in the so-called "emerging market" economies. At the centre of the (unwanted) attention at the moment is India, which is seeing a rapid outflow of capital and thus a rapid fall in the value of its currency, the rupee. But many other emerging market economies, other than China, have also seen similar outflows and weakening of currencies recently.
This is not necessarily a bad development. The currencies of many emerging market economies, especially those of Brazil's real and South Africa's rand, had been significantly over-valued, damaging their export competitiveness. Devaluation could actually help these economies put their growth on a more sustainable path.
However, people are rightly worried that too rapid flows of capital out of these countries may cause excessively fast devaluations, resulting in currency crises and thus financial crises, as happened in eastern Asia back in 1997. Situations like this can arise because the currencies of the emerging countries have been propped up by something that can quickly disappear – that is, the large inflows of speculative capital from the rich countries. Given its nature, such capital is ready to pull out at any moment, as an increasing portion of it has been doing for several months.
This is a stark reminder that things are still not well with the world economy, five years on from the outbreak of the biggest financial crisis in three generations in September 2008.
We have had such huge capital inflows into the emerging economies mainly because of quantitative easing (QE) by the central banks of the US, Britain, and other rich countries, which injected trillions of dollars into the world economy, in a desperate attempt to revive their moribund economies.
In its initial phase, QE may have had acted like an electric shot to someone who just had a cardiac arrest. But subsequently its boosting effects have been largely through the creation of unsustainable asset bubbles – in the stock market, in property markets and in commodity markets – that may burst and generate another round of financial crises. On top of that, it has caused much collateral damage to developing countries, by overvaluing their currencies, helping them generate unsustainable credit booms, and now threatening them with the prospect of currency crises.
If its effects are at best debatable and at worst laying the ground for the next round of financial crises, why has there been so much QE? It is because it has been the only weapon that the rich country governments have been willing to deploy in order to generate an economic recovery.
QE has become the weapon of choice by these governments because it is the only way in which recovery – however slow and anaemic – could be generated without changing the economic model that has served the rich and powerful so well in the past three decades.
This model is propelled by a continuous generation of asset bubbles, fuelled by complex and opaque financial instruments created by highly leveraged banks and other financial institutions. It is a system in which short-term financial profits take precedence over long-term investments in productive capabilities, and over the quality of life of employees. If the rich countries had tried to generate recovery through any other means than QE, they would have to seriously challenge this model.
Recovery driven by fiscal policy would have involved an increase in the shares of public investment and social welfare spending in national income, reducing the share going to the rich. It would have generated new public sector jobs, which would have weakened the bargaining power of capitalists by reducing unemployment.
Recovery based on a "rebalancing" of the economy would have required policies that hurt the financial sector. The financial system would have to be re-engineered to channel more money into long-term investments that raise productivity. Exchange rates would have to be maintained at a competitive level on a permanent basis, rather than at an over-valued level that the financial sector favours. There would have to be greater public investment in the training of scientists and engineers, and greater incentives for them to work in and with the industrial sector, thus shrinking the recruitment pool for the financial industry.
Given all this, it is not a big surprise that those who benefit from the status quo have persisted with QE. What is surprising is that they have actually strengthened the status quo, despite the mess they have caused. They have successfully pushed for cuts in government spending, shrinking the welfare state to the extent that even Margaret Thatcher could not manage. They have used the fear of unemployment in an environment of shrinking social safety nets to force workers to accept more unstable part-time jobs, less-secure contracts (zero-hour contracts being the most extreme example), and poorer working conditions.
But is this maintenance, or even fortification, of the ancient regime likely to continue? It may, but it may not. Greece, Spain, and other eurozone periphery countries could explode any day, given their high unemployment and deepening strains of austerity. In the US, which is considered the home of quiescent workers, the call for living wages is becoming louder, as seen in the current strikes by fast-food restaurant workers. The British are (overly) patient people, but they may change their mind when the full extent of budget cuts unfolds in the coming months.
All of these stirrings may amount to little, especially given the weakened state of trade unions, except in a few countries, and the failure of the parties on the left of centre to come up with a coherent alternative vision. But politics is unpredictable. Five years after the crisis, the real battle for the future of capitalism may be only just beginning.
Wednesday, 11 January 2012
Skyscrapers 'linked with impending financial crashes'
There
is an "unhealthy correlation" between the building of skyscrapers and
subsequent financial crashes, according to Barclays Capital.
China is currently the biggest builder of skyscrapers, the bank said.
India also has 14 skyscrapers under construction.
"Often the world's tallest buildings are simply the edifice of a broader skyscraper building boom, reflecting a widespread misallocation of capital and an impending economic correction," Barclays Capital analysts said.
The bank noted that the world's first skyscraper, the Equitable Life building in New York, was completed in 1873 and coincided with a five-year recession. It was demolished in 1912.
Other examples include Chicago's Willis Tower (which was formerly known as the Sears Tower) in 1974, just as there was an oil shock and the US dollar's peg to gold was abandoned.
And Malaysia's Petronas Towers in 1997, which coincided with the Asian financial crisis.
The findings might be a concern for Londoners, who are currently seeing the construction of what will be Western Europe's tallest building, the Shard.
That will be 1,017ft (310m) tall on completion.
China bubble?
Investors should be most concerned about China, which is currently building 53% of all the tall buildings in the world, the bank said.
A lending boom following the global financial crisis in 2008 pushed prices higher in the world's second largest economy.
In a separate report, JPMorgan Chase said that the Chinese property market could drop by as much as 20% in value in the country's major cities within the next 12 to 18 months.
In India, billionaire Mukesh Ambani built his own skyscraper in Mumbai - a 27-storey residence believed to be the world's most expensive home.
Local newspapers said the house required 600 members of staff to maintain it. Reports suggest the residence is worth more than $1bn (£630m).
"Today India has only two of the world's 276 skyscrapers over 240m in height, yet over the next five years it intends to complete 14 new skyscrapers," according to Barclays Capital.
Barclays Capital's Skyscraper Index has been published every year since 1999.
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