The new UK gov abolishes the FSA (Financial Services Authority)

This is big news in the UK, where the FSA is the equivalent of the SEC in every respect: responsibilities, but also failure to achieve its duties, and general uselessness as it interferes with the investors duties to perform their own due diligence.

Unfortunately, this seems to be more a political move than anything else: let's just put the failure on Gordon Brown's back (he created the FSA) by abolishing this agency, but keep the responsibilities and duties and transfer them to the Bank of England.

June 16 (Bloomberg) -- Chancellor of the Exchequer George Osborne said he will abolish the Financial Services Authority and give most of its power to the Bank of England, in the most sweeping changes to Britain’s financial regulatory system in more than a decade.

The financial watchdog will be wound down and replaced by three bodies over the next two years, the chancellor said. A Prudential Regulatory Authority will be created as a subsidiary of the central bank. Osborne will also set up a Financial Policy Committee at the bank and establish a consumer protection and markets agency.

Gordon Brown: unemployment has fallen “as a result of the action that we have taken”

This is not very new, but I had saved it hoping to post about it as soon as I get a moment, and here we are, two weeks later... Anyway, here's a quote from the FT:

As the numbers claiming jobseekers’ allowance fell by 32,300 to 1.59m in February, Gordon Brown, prime minister, said unemployment had fallen “as a result of the action that we have taken”. However, the number of people classed as economically inactive shot up by 149,000 to a record level of 8.16m, largely driven by an increase in students as young people took refuge in education instead of seeking jobs.
The unemployment rate, down 0.1 percentage point at 7.8 per cent of the workforce, compared with 9.9 per cent in the eurozone and 9.7 per cent in the US.
The Conservatives said that hidden unemployment was rising and warned of a “jobless recovery” under Labour.
The employment statistics showed the NHS had added another 20,000 people to its workforce in the final quarter of last year in spite of facing a real-terms freeze in its budget for frontline care from next year.
Compared with a year ago, the NHS is employing 62,000 more people. Its 1.62m headcount is at an all-time high.
Alan Downey, head of public sector business at the consultant KPMG, said the NHS numbers were “genuinely quite shocking” given the public spending squeeze to come. “They are clearly not living in the real world,” he said. The rise in the NHS workforce comes despite a report from McKinsey, the management consultants, to the department of health last autumn suggesting that the NHS in England may need to shed 10 per cent of its workforce, or about 130,000 jobs over the next five years.
Mr Downey said his impression for most of the past year was that the health service “has been sleepwalking into a crisis”.

So basically, Gordon Brown is now employing soviet style reporting, along his soviet style policies. The new campaign from the conservatives is making quite some points:

The UK: Deathbed of Keynesian Economics

Many friends sent me a link to this is a fantastic report by Matthew Lynn, on Bloomberg:

Feb. 23 (Bloomberg) -- The U.K. has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance.

So it may be fitting that the U.K. will also become the deathbed of Keynesian economics.

Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.

Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.

The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked “bankruptcy imminent.” At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.

The public debate about the state of the British economy was enlivened last week by a brawl between economists.

On Feb. 14, a group that included the former Bank of England policy makers Tim Besley, Howard Davies, Charles Goodhart and John Vickers published a letter to the Sunday Times calling on the government of Prime Minister Gordon Brown to control the ballooning deficit. If it didn’t, the stability of the economic recovery would be threatened, and there would be a run on the pound, they warned.

That brought a stinging response from the Keynesians, who are urging the U.K. to spend its way out of recession. Nobel laureates Joseph Stiglitz and Robert Solow were among the signatories to letters written by a group of 67 economists insisting that deficit spending was the only way to salvage the economy. The letters, published in the Financial Times, argued that a “a sharp shock” now “would be positively dangerous.”

So who is right, and who is wrong? It’s a debate that matters to the rest of the world. After all, if demand management doesn’t work here, it won’t work anywhere.

The U.K. has some experience of mass letter writing from Keynes’s devotees. In 1981, a group of 364 economists wrote an open letter ripping into the policies of then Prime Minister Margaret Thatcher. They turned out to be totally wrong, of course. With hindsight, no one can now dispute that her policies led to a long and durable economic revival.

And just as the Keynesians were wrong three decades ago, they are wrong now.

The U.K. has been in Keynes overdrive for the past 18 months. The budget deficit is already more than 12 percent of gross domestic product, on a par with Greece. And while the Greeks are cutting spending, the British deficit is widening. Figures for January showed another fiscal blowout. At the same time, interest rates have been slashed to 0.5 percent. And the pound has slumped in value, which is supposed to boost demand for British goods, and help close the trade gap.

Just about everything possible has been done to encourage consumption. The results have been miserable.

Retail sales excluding gasoline in January fell 1.2 percent from the previous month, twice as much as economists forecast. The number of people receiving unemployment benefits jumped to 1.64 million in January, the highest level since April 1997. The yield on U.K. government debt is now higher than on Spanish or Italian bonds, a sure sign that investors are losing faith in the country’s ability to pay its debts. The inflation rate has also accelerated to 3.5 percent.

In reality, Britain has the worst of all possible worlds: a stagnant economy, a crippling budget deficit and rising prices.


The Keynesian consensus is that things would have been far worse without the stimulus provided by government. And if the economy isn’t pumped up with inflated demand, it will collapse back into recession. If it’s not working, that just proves the stimulus should be even larger.


It is the argument quacks always push: If the medicine isn’t working, increase the dosage.


And yet, reality has to intrude into this debate at some point. The deficit can’t get much bigger, interest rates can’t be cut much lower, and sterling can’t lose much more value.


Stimulating the economy isn’t working.

In fact, it’s only making it worse. Consumers and businesses don’t want rising taxes. A falling currency pushes up the cost of everything the U.K. imports, stoking inflation. Savers get decimated, and yet the banks remain reluctant to lend because they rightly believe the economy is in the doldrums.

What’s needed is a total change of direction. Get the deficit under control. Raise interest rates to restore confidence in the pound, and reward saving. Cut taxes to stimulate enterprise and investment.

And yet the real lesson of the U.K. in 2010 will be of wider significance. A country can’t spend its way out of a recession. And it can’t fix what was at root a problem of too much debt by just borrowing more and more.

In the country of its birth, Keynesian economics is being tested. If the economy isn’t growing at a healthy clip again by the end of 2010, its failure will be obvious to everyone.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

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.

UK on the brink of complete collapse

I keep on criticizing very harshly the US for their political leaders and policies of the Fed, but let's not forget that the UK is in a far worst shape than the US, and that Gordan Brown and Mervyn King are far more dangerous than even the Bernanke/Obamas they've got on the other side of the Atlantic.

You want to read these two posts to refresh your memory:

• 2009-03-26 The UK getting closer and closer to collapse
• 2009-03-27 Gordon Brown: The devalued Prime Minister of a devalued Government

Now here are two quite worrying pieces of information published by Bloomberg:

April 23 (Bloomberg) -- U.K. government support for the banking system has risen to 1.4 trillion pounds ($2 trillion) and may climb higher as the financial crisis spreads to building societies and economists warn lenders may need more aid.

Prime Minister Gordon Brown’s government yesterday offered to guarantee some mortgage-backed bonds, adding as much as 50 billion pounds to the bailout that began with the collapse of Northern Rock Plc in 2007. The amount invested in, loaned to or pledged to back bank assets now equals Britain’s gross domestic product, or 22,800 pounds for every person in the U.K.

The 1.4 trillion figure doesn’t count government pledges to stimulate the economy.

April 23 (Bloomberg) -- The U.K.’s plan to sell a record 220 billion pounds ($318 billion) of gilts this year to revive the economy may cause investor “indigestion,” according to some of Britain’s biggest bond traders.

The amount, 50 percent more than the 146.4 billion pounds sold in the fiscal year that ended March 31, may be too much for the market to absorb, according to Royal Bank of Scotland Group Plc.
[...]
“The U.K. is mortgaged up to the hilt,” Paul Day, chief market analyst at MIG Investments SA, said in an interview from Singapore yesterday.

Now, it is fortunately still time to take your side and maybe protecting the remaining little value that is still given by the market to your GBPs. I am short the GBP against the EUR and long Gold and Silver.

Gordon Brown: The devalued Prime Minister of a devalued Government

Daniel Hannan, MEP violently criticized Gordon Clown at the European Parliament.
Finally someone with some political courage to speak some truth...

Full transcript here (below also the video):

Prime Minister, I see you’ve already mastered the essential craft of the European politician, namely the ability to say one thing in this chamber and a very different thing to your home electorate. You’ve spoken here about free trade, and amen to that. Who would have guessed, listening to you just now, that you were the author of the phrase ‘British jobs for British workers’ and that you have subsidised, where you have not nationalised outright, swathes of our economy, including the car industry and many of the banks? Perhaps you would have more moral authority in this house if your actions matched your words? Perhaps you would have more legitimacy in the councils of the world if the United Kingdom were not going into this recession in the worst condition of any G20 country?

The truth, Prime Minister, is that you have run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the child. Now, once again today you try to spread the blame around; you spoke about an international recession, international crisis. Well, it is true that we are all sailing together into the squalls. But not every vessel in the convoy is in the same dilapidated condition. Other ships used the good years to caulk their hulls and clear their rigging; in other words – to pay off debt. But you used the good years to raise borrowing yet further. As a consequence, under your captaincy, our hull is pressed deep into the water line under the accumulated weight of your debt We are now running a deficit that touches 10% of GDP, an almost unbelievable figure. More than Pakistan, more than Hungary; countries where the IMF have already been called in. Now, it’s not that you’re not apologising; like everyone else I have long accepted that you’re pathologically incapable of accepting responsibility for these things. It’s that you’re carrying on, wilfully worsening our situation, wantonly spending what little we have left. Last year - in the last twelve months – a hundred thousand private sector jobs have been lost and yet you created thirty thousand public sector jobs.

Prime Minister, you cannot carry on for ever squeezing the productive bit of the economy in order to fund an unprecedented engorgement of the unproductive bit. You cannot spend your way out of recession or borrow your way out of debt. And when you repeat, in that wooden and perfunctory way, that our situation is better than others, that we’re ‘well-placed to weather the storm’, I have to tell you that you sound like a Brezhnev-era apparatchik giving the party line. You know, and we know, and you know that we know that it’s nonsense! Everyone knows that Britain is worse off than any other country as we go into these hard times. The IMF has said so; the European Commission has said so; the markets have said so – which is why our currency has devalued by thirty percent. And soon the voters too will get their chance to say so. They can see what the markets have already seen: that you are the devalued Prime Minister of a devalued government.

Full video available on YouTube:

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)

"I will not allow house prices to get out of control" Gordon Brown

Even though I can remember how I got there, I found this on the Renegade Economist. This quote is so famous and so hilarious that I couldn't keep myself from posting it as a praise for our beloved leaders and politicians.

When Tony Blair’s Labour Party secured power with a landslide victory in 1997, Brown was appointed Chancellor of the Exchequer. In his first budget speech to the House of Commons on July 2, 1997, he made a promise to the people of Britain:

“I am determined that as a country we never return to the instability, speculation, and negative equity that characterised the housing market in the 1980s and 1990s. Volatility is damaging both to the housing market and to the economy as a whole. So stability will be central to our policy to help home owners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery”.

Gordon Brown's reform is quite the opposite of what you would expect.

According to reuters:

The proposed banking reform bill will allow short-term non-disclosure of liquidity assistance by the Bank of England[...]