Bank of England

Turn the economy round: release funding for real projects

localise2

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Richard Murphy for Tax Research UK advocates positive action by government

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Points made in January are just as relevant today

30% of all government debt is owned by the Bank of England – which is government owned – so debt is not as high as the Tories claim and the need for debt reduction not as pressing as the Tories say. This debt can be cancelled, releasing funding for real projects.

  • Investing in HMRC is about revenue-raising: closing the tax gap of up to £120bn is an essential part of this agenda.
  • Green quantitative easing involves spending money to create jobs: £200bn went to save banks which are not doing this.
  • Real pension reform is essential. Why give £37bn a year for pension tax reliefs when pension funds refuse to invest in job creation the £80bn a year they get as a result?

Murphy concludes:

If one quarter of pension fund money (£80bn a year) went into job creation, matched by a similar sum from green quantitative easing, investment in the UK could be transformed and gradually turn the economy around.

 

 

Inventor of QE and Green MP call for up to £70bn Green Quantitative Easing to Stabilise Flagging UK Economy

localisewm

Practical proposals emailed to us by our founder member Colin Hines:

*** NEWS RELEASE ***

EMBARGO: 00.30am, Thursday 9 February 2012

INVENTOR OF QE AND GREEN MP CALL FOR UP TO £70BN GREEN QUANTITATIVE EASING TO STABILISE FLAGGING UK ECONOMY

Economist Professor Richard Werner, who proposed the term “quantitative easing” in Japan in the 1990s, and Caroline Lucas MP, of the Green New Deal Group, are calling for a £70 billion programme of “Green Quantitative Easing”in order to create hundreds of thousands of jobs, and set the country on course for a transition to a genuinely green economy.

In a report launched today, Professor Werner, Director of the Centre for Banking, Finance and Sustainable Development at the University of Southampton, makes the case that Green QE can reach parts of the economy that traditional QE has failed to do, making a real difference in terms of jobs and the environment.

Prof. Werner said:

“The Bank of England is expected to announce today a further round of Quantitative Easing to follow the £200 billion of QE1 announced in 2009 and the £75B of QE2 announced last year.

“This staggering £275 billion largely ended up with the banks in the futile hope that it would result in a substantial increase in UK lending to business. Instead it was used to rebuild their balance sheets and invest in commodity speculation.

“To ensure that this does not happen again, we need a different kind of QE, to help the wider economy directly and to implement some badly needed green projects that would enhance the sustainability of the economy and improve the environment—as well as creating thousands of new jobs.”

Green MP Caroline Lucas (Brighton Pavilion), who has welcomed the report, said:

“It is understandably difficult for people to get their head around the idea that the Bank of England could magic out of nothing up to £70 Billion of Green Quantitative Easing. Yet it has already e-printed £27 billion (around £4,000 for every man woman and child in the UK) in an effort to get increased borrowing to British business via giving the money to the banks. But this money has completely failed to reach small businesses in the real economy which urgently need support.

“The bankers have had their £275 billion chance.  Now it’s time for the Bank of England to help create jobs, stabilize the economy, and support the environment through a package of Green Quantitative Easing. I will be calling upon MPs of all parties to support these proposals, and urging my Parliamentary colleagues on the Treasury Select Committee to raise the issue of Green QE when they next question Sir Mervyn King.”

The Green New Deal group has called for Green QE to initially spend up to £20 billion on fitting free solar PV for the occupants of the roughly 3 million south facing roofs, best suited to capture the maximum amount of energy. Based on last year’s figures when around 20,000 installation jobs were created putting PV on 150,000 dwellings, a million home a year programme would eventually create 140,000 jobs. If that were to be extended to all the potential 9 million homes that could benefit from PV installation at a cost of up to £55 billion, then the employment growth would be much larger still. The households involved would save up to £250 per annum in reduced electricity bills.

A further £16 billion of Green QE could be spent kick-starting the Government’s Green Deal energy efficiency programme for homes. The Government expects this to support at least 65,000 jobs in insulation and construction by 2015. Local authorities, many of whom are already involved in planning to make tens of thousands more local homes energy efficient, could access a QE Green Deal fund to initially finance such work.

Professor Richard Werner said:

“These are exceptional times and they call for exceptional action from the Bank of England. Mervyn King has expressed a desire to see QE help tackle “the most serious financial crisis at least since the 1930s if not ever.” Another serious crisis is climate change and Green QE could not only help address that, but through the huge number of jobs and business opportunities involved, it could also help tackle our financial crisis.”

Press contacts:

Professor Richard Werner

University of Southampton

Mob: 07717 855478

Email: R.Werner@soton.ac.uk

Colin Hines

Convener Green New Deal Group

Tel: 0208 892 5051

Mob: 07738164304

E: hinescolin@gmail.com

Melissa Freeman

Senior Parliamentary Press Officer

Office of Caroline Lucas MP

House of Commons

Tel: 020 7219 0221

Mob: 07590 050565

Email: melissa.freeman@parliament.uk

Website: www.carolinelucas.com

Time for interest rates to be sorted – Alternative Inflation Report

LWM_Lydon

Inflation in the UK is officially supposed to be about 5% and thus is the highest among the developed economies who founded the G7. Despite this our Bank of England ‘Base Rate’ has for nearly 3 years been  0.5 % – one of the very lowest in the developed world and lower than that of  the Eurozone.

But in the real world,  borrowers in the UK are paying some of the highest interest rates in the developed world. We have highlighted this in previous reports and the chart (left) brings together some most recent comparable figures assembled by all Europe’s central banks and contributed to the ECB Data Warehouse.

We have compared the UK figures here with the Eurozone leaders and some of the countries in distress. The rate for savings is based on deposits that are only tied up for three months and the rate for loans is based on loans for house purchase based on a term of  at least 5 years .  So the savings rate is the one that would be appropriate to new and modest savers, and the housing rate is one of the most used in the UK given how much borrowing (even for business) is based on using houses as security.

With savings rates being so unattractive, there is little incentive to keep any savings in the UK. For example UK pensioners in Europe would get a better rate of return in keeping as much of their pensions as possible in accounts on the continent rather than leaving them in their UK £ accounts. Businesses would get an even better return on cash balances on the continent.

Hence the Pound, which has fallen by 20% since the credit crunch, has had no upward pressure on it since the time the very lowest of interest rates has been officially justified. This devaluation has exaggerated price increases in the UK. However, we have argued in earlier reports that devaluation has not and cannot now do much for employment in exporting industries.

Interest rate adjustment for 2012

Hence we now think that the government and the Bank of England should change the way they give guidance to the banks in setting interest rates. The Bank of England should now be recommending a savings rate of about 2% and maybe a lending rate based on 4%. They should discard the fictional rate of 0.5%. This would boost the £, and therefore bear down on inflation. But it would also safeguard domestic purchasing power and give a much needed boost to confidence.

Another variant would perhaps be not to recommend a drop in lending rates, but to suggest that the banks adopt a distress rate of 4% for individuals and sectors in difficulty. The banks could be told to come back with proposals for applying this first in the regions that are experiencing particular difficulties.

In the current crisis the West Midlands, where we are based, has suffered some of the worst increases in unemployment, especially for young people. This is a distress that is not evenly spread across the UK. Scotland for example has even seen unemployment fall in 2011. So the Bank of England could ask that the banks report on the credit situation in the Midlands.  This would be like the scrutiny regularly undertaken by the US Federal Reserve, who publish what is called the Beige Book, consisting of feedback from the local economies across the whole USA. Initiating such open assessments would allow the consideration of  distress arrangements that might be appropriate, as an initial step towards stability and relief in 2012.

Where the money is to be found

It can be seen that the UK banks are adding a stunning mark-up to the money they are lending. This mark-up cannot be justified in the current circumstances. Based on the rates presented in the chart above, the mark-up in the UK is roughly 700%. This is far higher than in any of the other countries in the chart. Their mark-ups on the same calculation would be:

Germany      200%

Greece        200%

France          80%

Ireland          40%

This scale of mark-up has only been occurring during our years of crisis. Back in 2004 the same calculations show a mark-up in the UK of a mere 64%, which was less than any of the other countries in the comparison. German banks were already marking-up 200% and the others averaged out at 135%.

This recent squeezing of their customers, while it must have done a lot for the profits of  UK banks, has done little for shareholder value.  But above all it has been the basis of the continuation of excessive bonuses for executives. The time has come when the revenues coming into the banking sector have to be adjusted to support savings in a UK that still imports other countries’ savings and also needs to relieve a UK  economy that in some parts is heading back into another recession.

So the time has come for the Bank of England to be more insistent upon its guidance, and get the banks to stop putting themselves first. The money is in their margins to allow this to be done. In 2012 we hope to attract more attention to how we would like to see the Bank of England reformed and made more accountable and responsive to the pressures being felt in the various parts of the UK economy.  We also hope to do this while continuing our long-standing work to change the way inflation is measured and controlled in the UK.

Our last report on inflation undermining consumer confidence and growth can be found here.

Andrew Lydon

 

 

Further details of our  Regional Prosperity & Inflation Project

Our mythical low interest rates – Alternative Inflation Report

LWM_Lydon

With inflation now clearly established above the 2% target – in defiance of the hopes of the Bank of England – most commentators are now expecting interest rates to rise in the months to come.

Interest rates paid by UK households are, however, already some of the highest in Europe, despite all the talk of record lows you will hear from the mainstream media. Here are our average mortgage rates compared to the sick men of Europe as well as Germany:

This is despite the UK Base rate being 0.5%, and the Main rate set by the European Central Bank being twice that at 1.0%.

The record lows are what the banks are paying to savers. As can be seen here against the same countries and sourced from the ECB Data Warehouse (to which the Bank of England contributes the UK figures).

Squeezing borrowers and paying so little to savers is the main reason why the banks are currently losing less money and paying out bonuses again. But the consequence is that the wider UK economy is not recovering unlike most of the rest of the world economy. A more up to dates comparison can be found here.

The need to boost the Sterling exchange rate

If more people and businesses with savings brought them into the Sterling economy, the Pound would recover from its prolonged weakness, and this would bolster the purchasing power of everyone in the Sterling economy in buying food and energy in the international markets. This is the way in which increasing interest rates for savers helps to bolster UK living standards and domestic consumption/employment.

To do this while discouraging abrupt increases in outgoings for borrowers, would require the Bank of England and the Treasury to urgently revise how the Bank of England ‘Base Rate’ is used as guidance. And this is a revision that is now well overdue.

Some might object that the sagging value of the Pound holds down our export prices. Twenty years ago when David Cameron was a Treasury special advisor, manufacturing accounted for about 25% of UK employment. And devaluation did launch the employment boom after the Pound fell out of the European Exchange Rate Mechanism in 1992.  But now manufacturing is just under 10% of employment, even in an old heartland like Birmingham. So gains or losses in manufacturing employment would need to be two and a half times as large to have an effect with any similarity to what happened while David Cameron was working for Chancellor Lamont .

So any monetary policy other than safeguarding domestic living standards makes less sense than ever before. Especially as the sort of inward investment in manufacturing that we saw after 1992 from the silicon chip industry, Toyota and even BMW is not happening now.

Getting inflation in proportion

Other major G7 countries are managing inflation better than we are. They measure it better. They measure it as it impacts upon different parts of their countries and social structure – something we want to see done here in the UK and are currently pressing for. This has allowed inflation to be long-term suppressed by more painstakingly proportionate decisions.

The USA gives out the most comprehensive set of inflation figures every month. This month the CPI-U, representing the broad urban population, is  2.1% .  But it also gives a CPI-W figure for ‘urban wage earners and clerical workers’ which this month is  2.3 %. But they don’t just give a national figure for each of these populations. They also give a CPI-U figure and a CPI-W figure for most of their big cities and the US census regions.

This has made the USA very sensitive to emerging inflation and has prompted the USA to be one of the world’s lowest inflation economies.  A worker in Chicago and the Mid-West knows whether his prices are rising in line with the official figures for his area, in a way that someone working in Birmingham, England cannot because we only get a couple of different national disembodied averages for our official figures. So if the US figures are out of proportion with what workers are finding in the American cities the figures can be challenged in a way they cannot be in the UK.

Although the monthly figures can vary quite a bit across the US, in the longer run their system keeps them in line. On the basis of the index running since the early 1980s, price rises for Chicago have been less than for the US as a whole.  But only by a couple of per cent over what is now a whole generation (USA average currently at 221 and Chicago at 216). Prices for the workers have risen less than for the broader population – 218 for the US and 210 for Chicago workers, despite the current monthly figure being higher.

France also has an index that is intended to represent the total population as well as one that represents what is called an urban household  headed by a worker. It is particularly used for adjusting the minimum wage. For France  inflation was   1.7 %  for the main population in February and 1.6 % for the worker’s household. Until the 1960s France used to only calculate an inflation rate for Paris and say that that was the French inflation rate. But they continued to maintain a Paris index until about the time the Euro was launched.

The French have been able to keep inflation for these worker households in step with that of the overall population. Below you will see the figures showing how prices have shifted in the first years of the Euro before any of the dramas of recent years intrude into the story. In the table below 100 = 1998.

The figures are very much in step, as were the US figures because a more sensitive approach to tackling inflation tends to follow from such detailed indexing.

The Italian indices for registering inflation are today pretty much identical to the French system. In February the inflation rate for the broadest population was  2.4 %, and 2.3 % for workers’ families. Unfortunately the Italians no longer translate their full monthly release. It can be deciphered with only a basic French/Italian at the link here.

Table 4 of the Italian monthly release gives inflation rates for most of Italy’s big cities. This is most probably because inflation indices were first started by the big industrial cities like Milan, and led by Milan. It was Mussolini who brought in the national index, almost certainly because it would justify lower pay settlements for workers in the industrial cities than the local city inflation rate would justify.

So a basic local figure has since acted as a double check on the system – as it does in the USA. Milan is Birmingham’s twin city and inflation there is slightly less than the Italian national norm being currently registered as  2.3  %.

German inflation for February is 2.1%. Germany now only does one figure for the broad population of Germany. But most of the large federal states have produced a figure for their own local population since the 1960s. The State of Hesse, which is home to Birmingham’s twin city of Frankfurt, has an inflation rate which is slightly lower at 1.8%. We also have a twin city in the former East Germany which is Leipzig in the state of Saxony. The Saxon inflation rate is currently higher at 2.2%

However, Germans have lost trust in German price statistics since Germany went into the Euro in 1999. This is because the German government abandoned its more extensive range of monthly inflation indices. Former West Germany had produced price indices based on four household types across Germany. They were as follows:

The old West Germany ran such sub-headings since the 1960s when the managerial household was added to complete this set. When the West took over East Germany in 1990 they began to run a parallel set of sub-indices for there. By 1999 when these sub-indices were abolished along with the D-Mark, they were holding the inflation rates for all these households remarkably in step in both the former East and West Germany. Based on 1995 being 100, the family households in both East and West were at 105 on the index, and the ‘All household’ indices and the pensioner households were on 106.

Germany abandoned these baskets when they entered the Euro. They said this was because there were not enough four-member families to justify it. But had they assembled a more contemporary basket for families they might have maintained the confidence that there had been in the old system.

From what has been shown here of how other G7 countries register inflation, you will be able to appreciate the basis of what we are proposing should become our framework of inflation indices.

Our report for last month, which outlined how the global price spiral had to become the focus of our domestic economic policy, can be found here.

Andrew Lydon

Regional Prosperity & Inflation Project

Alternative Inflation Report – Bank of England failure ?

LWM_Lydon

The highest rate of inflation among the original G7 members, is currently our UK inflation rate. Although there is much doubt about how representative the official UK figure is, no one really believes the official figure over estimates inflation. The October figures can be found at the foot of this report.

Over a decade after inflation and interest rate management was taken out of the hands of politicians this is an unexpected predicament. The whole logic of the hope of the 1990s was that the UK would have a sounder monetary system if politicians and their short-term agendas were taken out of this level of economic management. That was supposedly the lesson of experience overseas.

In 2010, one now has to ask whether price stability would have been better served, had it been something for which Gordon Brown, Alistair Darling, George Osborne or David Cameron had still been answerable every week at Question Time. This would have been a question that would have been asked for some years now, had not the entire political class rallied behind the Monetary Policy Committee system that New Labour used to claim was its most important reform.

UK inflation has now been above its target for most of the last 4 years. By contrast none of the other G7 has above target inflation. The standard G7 target is 2 % or less. An inflation rate of zero would be seen as the ideal. But here the UK is the odd man out. Our central bank would have to explain itself if the inflation rate was less than 1 %. Such a rate would be treated as as form of deflation, something to be averted here in the UK, unlike in other countries. Other countries trust their inflation indices and if inflation is reported as being about zero, that would not be regarded as a potential economic crisis but as an achievement.

The UK inflation indices are being reviewed by the UK Statistics Authority and we have been making representations to them about how our inflation indices can be more securely based. Details of the lessons from other countries can be found in our September report.

 

Should global inflation not fall back as the Bank of England hopes, the UK would be further blighted by already having the highest inflation. In our previous reports we have emphasized how global food, energy and resource prices are being driven up by ecological and population pressures. Being geared to respond to this sort of inflation will become the main challenge of economic policy across the planet.

However, the recent concern over ‘Currency Wars’ needs to alert us to another aspect of the global price shift that none of the mainstream economic commentators have picked up on. The US wants the Chinese to allow the Yuan to rise against the Dollar and other major currencies, so that Chinese made goods are not under-priced in comparison to other producers (and especially the US). However, this must necessarily mean that the price of the goods China manufactures will then rise alongside food and resource prices. Against this background, the Bank of England’s confidence that inflation is temporary, even if an increasingly long ‘temporary’, seems very complacent.

One of the major reasons why the Bank has got away with such complacency, is the very poor scrutiny they come under from the mainstream media. Most months the announcement of the official inflation figure is accompanied in many media by an economist from the banking sector telling us that inflation is not the real worry, and that interest rates need to be kept down. At the moment the profits and bonuses in the banks are largely the result of them being able to borrow off the public at the historic low interest rates and lend out at much higher rates.

This usually goes unquestioned  by the media, adding to the confusion over inflation in this country and the negligence with which it is addressed. It is at its most objectionable when the BBC allows the bankers to spread this confusion through a media service paid for by taxpayers. For November’s announcement  BBC 24 had on the economist from the investment bank Investec, last month it was his counterpart from HSBC.

The BBC tends to say that the difference between the Consumer Price Index (CPI) rate of inflation and the Retail Price Index (RPI) rate of inflation is that housing costs are included in the RPI. But this is an over-simplification bordering on misrepresentation.  There are housing costs in both indices. When we look back on the biggest house price bubble in British economic history over the last decade, no one can argue that even the RPI  registered the cost of housing in such a way as to prompt the adjustment of interest rates to curb it.

By contrast in the USA,  once house prices reached 4 times average houshold income in 2005, this cost had such weight in  the US Consumer Price indices that it raised the inflation figure. This raised the alarm with the central bank that prompted the interest rate increase that brought their relatively minor house price boom to an end. House prices fell back to below their long term trend of  3 times household income.

That American Consumer Price Index is an index that can be properly said to take housing costs into account. The current high level of our RPI inflation has nothing to do with the fact that our UK houses are still over 4 times average household income. While the RPI might talk the talk about taking housing costs into account, it does not walk the walk  in the way that  the US  consumer price indices do.

Stephanie Flanders, the BBC’s economics editor is listed as a member of the ONS’ s advisory committe on the inflation indices. ( Their current report can be found here. )  This advisory committee has resisted change to these poorly constructed indices since before the 1990s.  They are now proposing the most minimal of changes to the current indexing system while supposedly accepting that housing costs must be better represented in the index. This graph is from Annex A of their report.

It shows how neither of their preferred options for change regarding housing ( Net Aquistions and Rental Equivalence) would have changed the inflation figures during the ‘boom’ by very much and so would not serve as any alarm in future. Their new figures would not be significantly different, whatever the advisory committee say.

In any event, properly involving housing costs in the indices is only part of what we want to see. Regionalising the indices is even more crucial as we explained in last month’s report.

October’s comparable inflation figures are currently

United Kingdom               3.2 %

Canada                          2.4  %

Italy                              1.7  %

France                           1.6 %

Germany                         1.3 %

USA                                1.2  %

Japan                              0.2 %

Andrew Lydon

Regional Prosperity & Inflation Project


Alternative inflation report – or what Mervyn King does not mention

LWM_Lydon

Our Retail Prices Index (RPI) stands at 4.8 % and the index the Bank of England targets – called the Consumer Price Index stands at 3.1 %. They are higher than the targeted indices of any of our G7 competitors.  Almost double the next one down the list.

France                 1.7  %

Germany            1.2 %

USA                      1.2

Italy                     1. 0 %

Canada                 1.0%     (June  figure)

Japan                 -0.7 %    ( June  figure)

This report was originally just intended to keep the fact that this country has usually got the highest inflation figure in the G7, despite us having inflation indices that understate inflation, in the minds of various people we are lobbying.  But we now use it to outline how our ideas about inflation are developing. As such we hope it is more interesting than the Bank of England’s quarterly Inflation Report, which concentrates on optimistic predictions that are almost always wrong in recent years.

We have consistently warned that food and energy prices are straining living standards across the world. Of course food is of far less weight than in the inflation baskets of the developed world than it was in the past , or than it is the developing world. It averages about 40% in some of the most populous Islamic countries, like Pakistan and Egypt for example, where social instability could have global consequences.

So although the fires and floods that are becoming a regular summer occurrence on the Europe-Asia landmass put pressure on our standard of living, it is many times more serious elsewhere.   

For example, Russia has again banned wheat exports which is already driving prices up outside that country. Stopping  farmers exporting is one of the world’s traditional ways of holding down prices in producer countries’ home markets.

Rather than inflation in the UK being the result of a series of one-off occurances as Mervyn King insists,  perhaps we are heading for a new world-wide era of Austerity. With inflation rather than deflation being the main global issue. What we have been promoting as our Regional Prosperity and Inflation Framework, might well have to serve as an ‘Austerity & Inflation’ Framework.

We have also recently published our outline of what an inflation index for our home region would actually tell us.

Using the most authoritative housing affordability figures for the regions – produced by the Halifax – we can see how housing prices, which should have weight in any proper inflation indices, demonstrate how a clear ‘Two Income Trap’ emerged under New Labour. It seems it now takes 2 incomes to buy a home that could be bought on one income when New Labour came to power. This fits with our long standing argument that two incomes are now required to run a household that could be run on one income a generation ago. But interestingly, the movement in house prices occurred as early as the Lawson boom of the late 1980s as far as the West Midlands is concerned. But real house prices fell back under John Major, before becoming the national phenomenon since. This is explained further on this project’s main webpage and it can also be accessed here.

This erosion in real wages did not help manufacturing jobs survive in the West Midlands, even in the later years of the Thatcher government. Had Nigel Lawson had an authoritative index for inflation in regions like ours, perhaps he would have heeded the warning it would have been sounding – and have restrained his inflationary boom before it became a national disaster. Labour would not then have slid down the same slipway. But that would have been a very different Britain, which might today have more manufacturing and less household debt than it has actually come to have.

We have recently set out a path for reform to the Statistics Authority’s review of inflation, and we are grateful to the Trust that has regularly supported us in this area of work  in recent years – The Andrew Wainwright Reform Trust.

Our report last month challenged the notion that we have been struggling with a global deflation in any way comparable to the 1930s and can be found here.

Andrew Lydon

LWM Regional Prosperity & Inflation Project


A trend set in – Alternative inflation report for June

LWM_Lydon

Our Retail Prices Index (RPI) stands at 5 % and the index the Bank of England targets – called the Consumer Price Index stands at 3.2 %. They are higher than the targeted indices of any of our G7 competitors.

France                 1.5  %

Italy                     1. 3 %

Canada                1.4  %   ( May  figure)

USA                      1.1  %

Germany            0.9 %

Japan                 -0.9 %    ( May  figure)

It looks like a trend has now firmly set in for us to be the G7  inflationary economy. Besides undermining our living standards this will help overseas companies keep their grip on our home markets. In the post war decades, we could always rely on the Italians and often the French to have higher inflation than us.

Much has been said about how various world leaders have saved us from a repeat of the 1930s. But no repeat of the 1930s deflation has ever been on the cards in the last few years.  The price of food and energy had fallen after the First World War and had no tendency towards rising until the rearmament began in the late 1930s. This can be seen in the graph below of the UK cost of living index, the vast majority of which was food and energy purchases.

By contrast there has been an under-lying upwards push on food and energy prices through out most of the last couple of crisis years. Recently we have seen demonstrations against  the price increases across India and as drought grips important grain producing regions around Russia  the upwards pressure on food prices is set to continue.

Commentators have been talking about how close we have been to deflation. But  in the UK particularly, this is indicative of the poor standard of economics in this country. Briefings from the Bank of England in particular, often seem to suggest that  inflation does not just mean that prices are rising. They imply that inflation only becomes something when wage claims begin to be put forward on the assumption that prices will go on rising.

We have recently set out how we think inflation and especially house prices have undermined the standard of living in our West Midlands home region which you can go to by clicking here.

Last month’s edition of this report included an examination of how the UK lost track of its own people’s living standards in the 1980s,  and how conservatives are still politically blighted by it.  It can be accessed here

Andrew Lydon

LWM        Regional Prosperity & Inflation Project

Alternative inflation report – Living standards in the West Midlands

LWM_Lydon

None of our current inflation indices register the unique house price inflation the UK has had. Had they done so in any manner comparable to Germany and the US,  there would have been far higher inflation registered across the UK under New Labour. Looking at housing  affordability indices gives us some idea of the seriousness of the real inflation being missed and an index that shows this up region by region would show a revealing story for the West Midlands.

Our house prices have changed so rapidly over the last generation in the UK  that we have adopted the practice of measuring affordability in terms of the number of years annual income one would need to buy a house. One of the most comprehensive set of figures for house prices across the regions has been compiled by the old Halifax Building Society (and its successors) since 1983.

The following chart shows their figures for 1983 for some of the ‘southern’ English regions including London.

The West Country, East Anglia and the East and West Midlands are included. I have left out the others so that the images are not too crowded. In the early years of  the Thatcher government, it is still the people of the West Midlands that find it easiest to buy their houses. The average house can be bought on the 3 times average male earnings that were the traditional lending standard. (But with a deposite also necessary).  It was London and especially the West Country where this was becoming a stretch. The full Halifax figures can be found here.

 

However look what had happened by September 1992 when the UK got kicked out of the Exchange Rate Mechanism.

It is now the West Midlands whose buying power has been erroded. The region is already on the way to being one where  a household, which not long before could be run on one income, could no longer. We were falling into what is in the USA refered to as the ‘Two Income Trap’. In the General Election of a few months before, the WM conurbation had for the first time  become the southern most sub-region to mainly vote  Labour.  The Conservative government lost here a whole Parliament before they lost the UK as  a  whole.  And even in 2010 the conurbation did not respond to David Cameron.

Under the John Major government house prices fell back and incomes slowly grew so that Labour did not actually inherit the Two Income Trap in 1997. But when the housing market peaked in 2007 we were all trapped. On the basis of traditional 3 times income lending, the whole of the UK was in the trap.  The average house required 5.86 times the average full time male wage . 2 incomes.  Most of the regions we have been particuarly looking at were slightly above that. The West Midlands had tasted this earlier than the others, but we were actually all in the same boat/trap now.How this situation will now evolve is difficult to say, but some regions will show a trend before others. Maybe it could even be that the West Midlands will show it up first. But for government to head off another wrong turn we will need to reform the way we measure inflation so that we have region by region figures that pick up housing inflation as part of the basket with other sensitive items such as food and energy.

Andrew Lydon

Lessons from the Thatcher/Reagan years – an Alternative inflation report

localisewm

The new coalition government have inherited the highest inflation rate in the G7. Higher even than China. And as they consider any sort of increase in VAT to pay off national debt they need to think about how they keep their finger on the national pulse as the country faces these challenges to their living standards.

Immediately on coming to power, Margaret Thatcher’s chancellor raised VAT, much against her initial reluctance. And this was the start of a process that lead to the popular perception that living standards had been badly hit under Margaret Thatcher. And for no lasting gain.

This chart shows the official story of living standards in the UK. We are supposed to be about twice as prosperous as we were in the 1970s.

The hard times under Thatcher and Major are merely slight setbacks that we quickly recovered from. But if people really bought that story, why did the Tories, even with the mess that Gordon Brown made of our economy, face such reluctance to allow them an overall majority in 2010? Birmingham and the West Midlands are a striking example of this reluctance.

Contrast this blight on the Tories to what happened in the US under Ronald Reagan whose heirs have never been blighted by Reaganism. Two George Bushes stand as evidence of this.

This chart shows that Reagan’s legacy was because living standards in the US were hit more under Nixon and Carter, and actually stabilised under Reagan. This chart and this outcome were in large part because they had good quality inflation and prosperity indicators.

When Reagan came to power, the US had long had monthly inflation figures for most big cities and even had regional indices. However, in the first years of Reagan they improved their inflation indices by revising the way housing was measured. This allowed them to apply counter-inflationary policies while having their finger on the pulse of the people’s economic life.

On behalf of LWM I am currently pressing the UK Statistics Authority to look at what can be learned from the system of US inflation indices.

History often seems to repeat itself, first time as tragedy, second time as farce. A government presiding over austerity that looses track of prices as they are felt across the country, would be a farce none of us would want to see. The coalition needs to allow the best inflation indices to be put in place and allow it the priority it deserves.

Andrew Lydon

Regional Prosperity & Inflation Project

 

How the banks need to be split up – and how not

localisewm

The Liberal-Conservative coalition agreement involves the setting up of a cabinet committee on Banking which will be chaired by George Osborne; and this committee will set up an independent commission to look into whether the banks need breaking up and how to do it.

As the banks collapsed in 2008, I was doing some research on banking regulation for Localise West Midlands, and followed the collapse very closely. Within weeks we reported on how the UK banking collapse was mainly evident in the banking centres outside the city of London. The banks that went down were the banks increasingly centred on Scotland and those that emerged out of northern building societies. Our report which is outlined on our website highlighted how Barclays and HSBC, the more City and international orientated banks, had not needed to be re-financed by us taxpayers.

It seemed to me that what had got our banks into this mess was the mania for a new globalisation. ‘We may be based in Bingley, but we can conquer the world !’ But that global role seemed to consist of finding that they could borrow huge sums of money on Wall St in New York, and using it to fund increasingly ridiculous mortgages in the UK. So prices of houses, especially outside London, were driven up – especially in relation to wages. So when this all went wrong, the banks would have bad loans based on houses which might not be worth what was paid for them. Hence bank shareholders walked away. And the taxpayer had to come in.

Exotic loan instruments have been blamed for the crash by most commentators, but most of those bits of paper were based on house prices at the end of the day.

We have argued that the banks need to be run and regulated on a more regional basis. House price inflation needs to be controlled as part of counter-inflation policy.

I welcome the coalition setting up an independent enquiry into the re-shaping of the banks. I look forward to bringing our conclusions of 2008 to their attention. The Brown government had systematically tried to close down debate on this issue. Credit must be given to Messrs Cameron and Clegg for re-opening the issue despite the hostility of the bankers.
ANDREW LYDON

The text of the Coalition agreement on the Banks is as follows:

4. Banking Reform

The parties agree that reform to the banking system is essential to avoid a repeat of Labour’s financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs.

We agree that a banking levy will be introduced. We will seek a detailed agreement on implementation.

We agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk.

We agree to bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry.

We agree that ensuring the flow of credit to viable SMEs is essential for supporting growth and should be a core priority for a new government, and we will work together to develop effective proposals to do so. This will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks.

The parties wish to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this would take time to get right, the commission will be given an initial time frame of one year to report.

The parties agree that the regulatory system needs reform to avoid a repeat of Labour’s financial crisis. We agree to bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.

The parties also agree to rule out joining the European Single Currency during the duration of this agreement.