The £200 billion that Mervyn King didn't get

This is old news, but I still think it's important to keep it in mind while thinking about the future of the GBP: the UK was probably the country were the credit bubble was the biggest (the UK and the US were competing for the title...) and is now probably experiencing the biggest credit deflation as well.

While this deflation is very bullish news for the GBP, the actions taken by the Keynesian Fools are very much likely to destroy the currency: Alistair Darling and Gordon Brown, who already driven the country in the ditch, debt-wise, and are now not only increasing the deficits, but with the help of Mervyn King, they are monetizing the debt.

This is the biggest credit deflation and economic down turn ever, and yet, prices are rising in the UK.

As you can see, they will not end this until they in the war against deflation.

Aug. 19 (Bloomberg) -- Bank of England Governor Mervyn King and two other policy makers were overruled in a push to expand the bank’s bond-purchase program to 200 billion pounds ($329 billion) as the majority favored a smaller amount.

The pound fell after the nine-member Monetary Policy Committee said it voted 6-3 to raise the total they will spend by 50 billion pounds to 175 billion pounds, according to minutes of the Aug. 6 decision released today. King, Timothy Besley and David Miles dissented in favor of a 75 billion-pound expansion.

“All members agreed that substantial further asset purchases were needed over the next three months,” the minutes said.

King, who has now been defeated three times as governor, said last week it’s “likely” that inflation will slow below 1 percent this year and won’t return to the goal until at least the end of 2012. Investors scaled back expectations for interest-rate increases next year after the comments.

“I’m stunned,” said Colin Ellis, an economist at Daiwa Securities SMBC and a former Bank of England official. “This sends a clear message that the bank is willing to do whatever it takes, and that’s encouraging. It’s more likely they’ll make extra purchases than start tightening over the next year.”

An argument for a larger expansion of the bond purchases was that “insufficient stimulatory monetary policy” would harm confidence in the recovery. The risks of “another large stimulus might be less than the possible costs of acting too cautiously,” and the policy could be reversed if found to be “overly expansive,” the minutes said. [...]

Inflation unexpectedly held at 1.8 percent in July, instead of slowing as all economists in a Bloomberg News survey had predicted. Policy makers said that without more purchases, “nominal demand would likely be insufficient to prevent inflation remaining below the 2 percent target, perhaps substantially, throughout the forecast period.”

Sterling crisis looming

I have been forecasting the collapse of the British Pound for quite some time and I am very bearish on this currency (last post was in March 2009: GBP to be devalued by 50%-70% within next 6-12 months). The recent rally in the GBP, which follows the rally in Equities and Bonds - the market playing the V shaped extremely fast recovery - is so ridiculous that I took it as an opportunity to increase my short position and I have kept capacity to do so for the time being.

Now it seems like other people are getting worried about the GBP (Jim Rogers has been extremely bearish on it, but as far as I know, he's one of the only guru openly predicting the collapse...) so it's refreshing to see this kind of report on Bloomberg:

June 30 (Bloomberg) -- The state of the U.K. economy fills British financial historian Niall Ferguson with foreboding.

“The probability of a real sterling crisis is around one in three, and the probability of major tax hikes and cuts in public spending is roughly one in one,” the Harvard University professor says.

Ferguson’s concern stems from the deterioration in the U.K.’s public finances, which prompted Standard & Poor’s to warn on May 21 that the country could lose its AAA debt rating. The firm estimated the cost of propping up Britain’s banks at 100 billion pounds ($166 billion) to 145 billion pounds and said government debts could double to almost 100 percent of gross domestic product by 2013.

Chancellor of the Exchequer Alistair Darling said on April 22 that this year’s government deficit would hit 12.4 percent of GDP. Alan Clarke, a London-based economist at BNP Paribas SA, expects it to reach 17 percent of GDP in 2010.

British Pound rises against common sense and market reality

As I wrote just about a month ago, the UK [is] on the brink of complete collapse and yet, the British Pound has been rising quite substantially against all market reality and expectations. Since I am short the GBP but the size of the position is not big enough because I didn't reject this kind of potential rebound, I am considering this as a good opportunity for shorting a bit more — which I actually did just today.

Here are some news about the UK:

May 21 (Bloomberg) -- Britain may lose its AAA credit rating for the first time as government finances deteriorate in the worst recession since World War II.

Standard & Poor’s lowered its outlook on Britain to “negative” from “stable” and said the nation faces a one in three chance of a ratings cut as debt approaches 100 percent of gross domestic product. The pound fell the most in four weeks versus the dollar before rebounding, the FTSE 100 Index slid 2.8 percent and the cost of insuring U.K. debt against default rose.

Britain needs to sell a record 220 billion pounds ($349 billion) of bonds in the fiscal year through March 2010 as the economy contracts and Chancellor of the Exchequer Alistair Darling predicts that the budget deficit will reach 175 billion pounds, or 12.4 percent of GDP. [...]

“Somebody will have to tackle the finances in the U.K., which has not been done at present,” said David Scammell, a money manager at Schroder Investment Management Ltd. in London, where he helps oversee $158 billion in assets. “The budget that we have is just unacceptable. You need a political will to deal with this enormous problem.”
[...]
Unemployment surged to 2.2 million in March, the highest since 1996, and tax income has dropped 10 percent in the past year. The IMF expects gross domestic product to contract 4.1 percent this year, the most since World War II.
[...]
Brown needs to increase borrowing to pay for rescuing banks that have reported $121 billion in credit-related losses and writedowns since the start of 2007. The government pledged 40 billion pounds to bail out lenders and hundreds of billions of pounds in loan guarantees.
[...]
The government gave the Bank of England authority to purchase as much as 150 billion pounds of assets with newly printed money in an attempt to lower borrowing costs.

Britain’s “balance sheet is deteriorating rapidly,” Moody’s analysts led by Arnaud Mares in London wrote in a report on April 23. “The government is taking risks with public finances.”

May 20 (Bloomberg) -- Delinquencies on some U.K. non- conforming home loans exceed those by subprime borrowers in the U.S., and losses on the securities they back are accelerating, according to independent research firm CreditSights Inc.

Almost 30 percent of non-conforming mortgages made in Britain in 2005 are 90 or more days delinquent, compared with a rate of 27 percent on U.S. subprime loans made that year, analyst David Watts wrote in a report today. Non-conforming loans are similar to subprime in that they typically have low, or no, documentation requirements and may be made to borrowers with poor credit scores.

“The similarity to the U.S. is already reflected in delinquency and repossession rates and we think it will be evident in eventual losses to investors,” London-based Watts said in an interview. “They have all of the hallmarks of the U.S. deals.”

Unemployment in Britain, which rose by 244,000 to 2.2 million in the first quarter and may reach 3.1 million by the end of next year, has coincided with “a sharp rise” in delinquencies, according to the report. Bradford & Bingley Plc, the nationalized U.K. mortgage lender, said in March provisions for bad loans soared 23-fold in 2008 and forecast “further deterioration” this year and next.

There are about 30 billion pounds ($46.5 billion) of bonds outstanding that are backed by non-conforming home loans, according to the report. The rate at which delinquencies are increasing in the securities is “alarming,” Watts wrote.
[...]
“Losses are high and going higher,” said Watts. “The numbers are ugly, uglier than I expected.”

UK overstated retail sales growth by 56%

When a bankrupt country, in the middle of a depression far worse than everything they could have imagined led by corrupt people like Gordon Brown, Alistair Darling and Mervyn King or their Members of Parliament, what are your choices after having done all the of the following in sequential order:

• destroying the value of currency by more than 25% in just about a year,
• massively understating the inflation and yet coming up with high inflation figures,
• denying any inflation even when the manipulated data fail to show anything but high inflation,
• pretending that deflation is what they are worried about.

You can try to fake all the other official numbers that you publish, and ask the others body of the government, like the Office of National Statistics to publish ridiculously positive numbers in a depressed environment:

(Financial Times) One of Britain’s most closely watched economic indicators has heavily overstated the quantity of high street sales over the past two years, the Office for National Statistics admitted on Friday.

Britain’s supplier of official statistics conceded that since the financial crisis began in August 2007, it has overstated the volume of retail sales growth by 56 per cent.

Many economists have been worried for some time that the published retail sales figures were too strong and have always received a furious response from the ONS.

Karen Dunnell, the national statistician, wrote to newspapers last October, insisting that “ONS retail statistics are the best available and are not inaccurate”.

She stuck to the same theme in another article, saying economists who had expressed surprise at the strength of ONS retail figures were upset because “City analysts also have a vested interest in not being proved wrong”.
[...]
Such a large difference in the one indicator that has persistently given a more positive account of Britain’s economy will cause red faces at the ONS, especially as it had insisted on the superiority of its retail data to unofficial estimates.

The UK getting closer and closer to collapse

Just two days ago, the official CPI figure in the UK came up at 3.2% and both Mervyn King and Gordon Brown where surprised by the numbers. I must admit that it's very surprising that with a currency that's been devalued by about 25% against the Euro and the US Dollar and 50% against the Yen in the past 18 months, plus having M3 figures skyrocketing by about 40% annualized, only the complete idiot and absolute incompetent must be surprised to see prices rise. When you think that the CPI figures are probably way understating what is actually going on in the country, you get somehow a bad feeling about the future of the GBP. From my own experience as a shopper, prices have been rising by much more than just 3%...

March 24 (Bloomberg) -- The U.K. inflation rate unexpectedly rose in February after higher food costs and the weakness of the pound sustained price pressures even as Britain’s recession deepened.

Consumer prices climbed 3.2 percent from a year earlier, the Office for National Statistics said today in London. The median forecast of 28 economists was for 2.6 percent.

Worse, those three idiots (you shall not forget about Alistair Darling!), think that decreasing prices will soon resume and that they must hence inflate even faster and harder.

Bank of England Governor Mervyn King wrote in a letter to the Treasury explaining the increase from the 3 percent limit that a “sharp decline” in the rate is likely to resume.

Chancellor of the Exchequer Alistair Darling replied that he welcomes King’s approach of looking through temporary effects on inflation, which officials say may be volatile because of the currency’s drop.
[...]
“February’s inflation outturn is somewhat higher than expected,” King wrote to Darling. “It is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile.”

The Bank of England has to do whatever is necessary to get Britain away from disinflation, policy maker David Blanchflower said yesterday.

So much stupidity is beyond imagination. It can exist only in the real world.

But just when you think you are seeing light at the end of the tunnel, it looks like the light is the train coming fast and that avoiding a complete wreckage is almost impossible. It also shows one more time that trying to micro-manage the economy is bound to failure because of the law of unintended consequences, that I have been talking about in the past:

March 26 (Bloomberg) -- [...] For the first time in almost seven years, the U.K. couldn’t find enough buyers for one of its debt sales when it offered 1.75 billion pounds ($2.55 billion) of bonds yesterday. The yield on 10-year gilts rose after the sale by as much as 20 basis points
[...]
Gilts have “only one buyer and that’s Mervyn King,” said John Anderson, a money manager who oversees about $3 billion in pound-denominated assets at Rensburg Fund Management in London. “You don’t need to look anywhere beyond that. Make your mind up, please, government. Do you want to buy gilts or do you want to sell them? You can’t do both.”

A couple of past posts that might be worth reading again:

• GBP to be devalued by 50%-70% within next 6-12 months
• GBP arbitrage opportunities gone, replaced by very high inflation

(Full disclosure: I have been massively short the GBP for about a month)

Mervyn King's Open Letter to Alistair Darling

Mervyn King, the Governor of the Bank of England has sent yet another letter to Alistair Darling to explain why inflation is about twice as high as the target of the BoE. Darling's ridiculous reply is available here.

He basically states that the rise of the prices is due to the plummeting value of the British Pound, which has lost 15% of its value in the past few months and rising costs of commodities. And that he expects inflation to be out of the target for at least a year.

He fails to point that the falling value of the GBP is due to the cut of the repo rate he made a few months ago and to the fact that investors are expecting further cuts and they know that neither Darling, nor Gordon Brown nor Merving King will have the political courage and the guts to defend their currency and will try to devalue their currency in the hope of getting more votes at the next election and save their own personal political career at the expense of the currency of their country and trading the future of the British citizens against a short sighted target (the ballot).

Merving King writes as if inflation was out of his control and that he couldn't do anything to prevent it, even though the only tool that can be used to fight inflation is the very tool that only the BoE controls: the BoE rate! Just raise the rates!

Darling/Brown and King are just playing a political game and gambling the future of their country. Shame on them!

Here's why cutting rates won't do any help but rather make things a lot worse:

• The very reason why we are in such a mess is that the rates have been kept too low for too long, creating the real estate bubble and the credit binge
• The UK citizens have the sad world records of both the biggest debt per capita across the whole world and the biggest dept per capita in the history. This is a two dimensional record that will hit the economy very hard and which also end in personal disasters.
• The UK imports most of the products and commodities it needs. Reducing rates will make the GBP fall further and hence increase the imported inflation while not having any upside.
• The UK doesn't have any productive force or industry. A falling GBP will not help export anything.
• The UK relies on foreigners across the whole world to do the low end jobs and the top end jobs. Most workers from Eastern Europe for example in the UK don't mind having low end jobs because it pays well compared to the income they have in their home country. Most people in the City are the same, but on the other side of the scale. They are the productive workforce of this country. They are now starting the leave, as I have seen reported many times and experienced among my colleagues/friends. Once it reaches the point very it's too late, the UK will understand how dependent it is the foreigners, but also how important it was to have a strong currency.
• The UK citizens need to save money, not spend more. Raising rates would help that.
• It won't work anyway, as shown in this Bloomberg report (this is a MASSIVE move):
  

  Sept. 16 (Bloomberg) -- The cost of borrowing in dollars overnight more than doubled to 6.44 percent, its biggest jump, according to the British Bankers' Association.

  The London interbank offered rate or Libor, increased 333 basis points from yesterday, the BBA said today.

So why will they lower rates? Because they are trying to reflate a real estate bubble that will only take longer to pop and cause more havoc. They somehow managed to convince people that borrowing for the rest of their lives to live in a one-bedroom flat 50 miles from their workplace is great and that houses should be unaffordable. This is the Great Con of the past several years. And now, people expect help from the government to prevent the house prices to collapse, at their own expense!

Actual people are getting bankrupt. Actual families are losing their homes. King/Brown/Darling are playing with the personal lives of their citizens for the benefit their own personal careers. This is just disgusting and sick.