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Bank Cannot Avert Downturn, Warns King

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The Times October 12, 2005

Bank cannot avert downturn, warns King

By Gary Duncan, Economics Editor

THE Bank of England’s Governor braced Britain for tougher economic times last night as he sounded a warning that the Bank could not stave off a downturn triggered by soaring oil prices (See Commentary, facing page).

Mervyn King admitted that the Bank’s Monetary Policy Committee had been caught off guard by an abrupt fall in growth and a sharp acceleration in inflation this year.

He emphasised the dilemma that the Bank faced from these conflicting pressures. Steeling the nation for economic turbulence, he suggested that those hoping that the MPC could resolve all of the economy’s problems with interest rate cuts would be disappointed.

“The MPC has been surprised by both the slowdown and the rate at which inflation has picked up,” Mr King told business leaders in Newcastle.

But in a blunt warning, he said: “Expectations of its ability to stabilise the economy must be realistic. The adverse effect of the rise in the oil price on consumers’ purchasing power cannot be avoided . . . There has grown up in recent years a false sense of our ability to maintain a smooth and steady growth rate of output.”

Mr King said that from 1992 the economy’s performance “might be characterised as the Great Stability”. This had fostered a view that the Bank could guarantee continuous steady growth.

But the Governor said such a belief was false. “The business cycle has not been abolished,” he said. He pointed to his earlier warnings that the Bank’s past strategy of stimulating consumer demand to boost growth “carried the risk that there could be a sharp correction to . . . consumer spending”.

That risk had now materialised. “With the additional impact of higher oil prices, real disposable incomes are rising more slowly, and the long-awaited rebalancing of the economy away from consumer spending to business investment and net exports is underway,” he said. But the Bank must also contend with inflation which would “for a short while be above target”. “Both inflation and output may be somewhat more volatile than the calm waters to which we had become accustomed,” he said. “And the MPC can do little to change that.”

In comments that will further dent hopes of rate cuts, the Governor also said that less than half the recent rise in inflation could be blamed on oil.

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Its underway :lol:

The downturn, lets see who passes the buck first, and who ends up carrying the can for this gi-normous credit wave the ecomomy has been riding on.

The chickens are coming home to roost

Batten the hatches, it going to get very interesting from here on in.

A long cold winter of discontent, not a very nice scenario for the miracle man himself B)

Mr Gordy Brown :blink:

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Jobless rate rises for eighth month

Wed Oct 12, 2005 9:41 AM BST

LONDON (Reuters) - The number of people out of work and claiming benefits rose for the eighth month running in September, the longest stretch of increases since the economic slump of the early 1990s, official figures showed on Wednesday.

The Office for National Statistics said claimant count unemployment rose by 8,200, more than double that predicted by analysts. August's rise was also revised higher to 2,700 from 1,600 previously.

Annual average earnings growth in the three months to August, meanwhile, remained steady at 4.2 percent, as expected, in a sign that the recent jump in inflation is still not feeding through to wages.

The figures are likely to boost expectations that the Bank of England will cut interest rates again in the next few months though Governor Mervyn King stressed this week that the central bank is still maintaining an open mind about the future direction of policy.

:lol:

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Our Kingsy is starting to remember that little word "independent".

He don't want to carry the can.

He'd like the economic historians to comment favourably in the future.

Oh to be a fly on the wall in a big office in No. 11.

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if they continue to fail to see the true cause of the problem, how are they going to solve it ? they are blaming it on oil and consumer spending, when its been hyper house inflation.

then they remove house inflation from the inflation figures and announce

"inflation is low" - which depends on if you own a home or not.

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"he suggested that those hoping that the MPC could resolve all of the economy’s problems with interest rate cuts would be disappointed."

:lol::D:blink:B)

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Like this one from the guardian report today

http://money.guardian.co.uk/businessnews/s...1589891,00.html

He acknowledged that some of the influences that had boosted consumer spending in recent years may be "going into reverse" and that there was great uncertainty about where it may go in future. That was a change from his previous statements that consumer spending was likely to rebound in the second half of this year.

Is this Mervyn King's way of saying that house prices are going in reverse, and credit cards have come home to roost?!!!

Very bearish

Sounds like there will be no more rate cuts

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Like this one from the guardian report today

http://money.guardian.co.uk/businessnews/s...1589891,00.html

Is this Mervyn King's way of saying that house prices are going in reverse, and credit cards have come home to roost?!!!

Very bearish

Sounds like there will be no more rate cuts

It could also mean that we will not see lower interest rates and the cycle is going into reverse - UP!!!

This is great. These people know exactly how much impact these sort of statements will have. Be interesting to see what happens with longer term rates and bonds with this news.

HEHEHEHEHEHEHEHEH

Edited by BubbleTurbo

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The Times October 12, 2005

Bank cannot avert downturn, warns King

By Gary Duncan, Economics Editor

“The MPC has been surprised by both the slowdown and the rate at which inflation has picked up,” Mr King told business leaders in Newcastle.

How can these b(W)ankers be "surprised" by a "slowdown" - they exist to predict these bloody things in advance??

Are these monkeys going to be "surprised" that a 'BUST' comes after a "BOOM"????

Who the hell runs this country???

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meanwhile, and for what it's worth:

It's time to take seriously a US-led global recession Lau Nai-keung

2005-10-06 07:37

http://www.chinadaily.com.cn/english/doc/2...tent_482807.htm

"the US will not have the energy to pick on China. Even when it is necessary to start another war to divert people's attention, it would pick one much smaller in size and weaker in strength, like Iran." :blink: ?!?

I think it is time that we should take a serious look at the possibility that the US is going to take us down towards a worldwide recession in one or two year's time.

It is well known that the US is the world's biggest economy, taking up about 30 per cent of global GDP, but it is now also the world's biggest debtor country. According to the most authoritative person on this subject, the US Comptroller General David Walker, who audits the federal government's books, the tab for the long-term promises the US Government has made to creditors, retirees, veterans and the poor amounts to US$43,000 billion, US$145,000 per US citizen, or US$350,000 for every full-time worker.

And this figure does not even take into account all the personal debts such as credit card bills and mortgages. With a low interest rate of 1 per cent running for the past three years in a row, savings plummeted to just 1.8 per cent last year, below 1 per cent since January and at zero in the latest estimate from the Bureau of Economic Analysis. In 2000, household debt broke 18 per cent of disposable income for the first time in 20 years. Credit card debt alone averages US$7,200 per household.

The US Government indebtedness is financed this way: The US now runs a trade deficit roughly 6.5 per cent of its GDP and the gap is widened every day. Its citizens are spending ever more on foreign goods, and with the US dollar as the international currency, the US Government just prints money to finance the deficit. And with this money, central banks in the surplus countries purchase most of the US Treasury bonds as currency reserve.

By now, Japan is the largest creditor of the US Government, and the Chinese mainland has been a fervent buyer for the last few years. As for Hong Kong, most if not all of our reserves are in US dollar denominated assets. The US Government in turn uses this foreign borrowed money to finance as much as 90 per cent of the federal deficit which stood at US$412 billion last year. The federal deficit is expected to be running at about US$2 billion a day at the moment.

Put it simply, the Americans have been living way beyond their means for much too long. On top of this, the Bush Administration is cutting tax at least three times while fighting an expensive war in Iraq, which has already cost the country US$700 billion, and currently progressing at US$5.6 billion per month. Now the US economy is dependent on the central banks of Japan, China and other nations to invest in US Treasuries and keep American interest rates down. The low rates keep American consumers snapping up imported goods.

Any economist worth his salt knows that this situation is unsustainable. This includes the country's economic guru driver Alan Greenspan, who recently warned his countrymen that the federal budget deficit would hamper the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. Now he may have to add two more worries: soaring oil prices and cyclones.

The US is now clearly in huge trouble, economically, socially, politically, and internationally. The Bush Administration bungled big in cyclone Katrina's aftermath in New Orleans, and then a minor rerun from Rita in Houston, and this will trigger the general outburst of people's dissatisfaction with the government, leading to great internal turmoil lasting for many years. In all likelihood, long-term interest rates are going to rise, and the greatest property bubble the world has witnessed is going to burst in the next one to two years.

The countdown is in progress, and there is no way that anybody can do anything to reverse it either by short-term measures such as fiscal and monetary policy, or through long-term reform of tax policy, entitlement programmes and even the entire federal budget. This is as inevitable as gravity, and it will take place under a new and inexperienced chairman of the Federal Reserve Board. I do not want to sound alarmist, but I see very bad omens.

To make things simple, let us just examine some key economic issues raised by some economists:

What if the dollar plummets? Do stocks follow? How about pensions?

What if interest rates soar? How would all the new homeowners, who stretched to buy with adjustable and interest-only loans, cover their mortgages?

How would consumers with record credit-card debt make their payments? Would they stop buying? Stop taking vacations? What will happen if they go bankrupt? New rules going into effect later this year make it harder on such debtors.

How would a government, which depends on the taxes of a strong economy to operate, keep all its promises?

To us, the good news is that when the country is in deep trouble, the US will not have the energy to pick on China. Even when it is necessary to start another war to divert people's attention, it would pick one much smaller in size and weaker in strength, like Iran. This will provide a much more amicable environment for China to make good use of its "period of strategic opportunity" till 2020 for the country to pass through a turbulent zone between per capita income of US$1,000-3,000.

But in the short term, now the US not only sneezes, and all symptoms indicate that it is going to suffer from a SARS-like trouble, the whole world should take extra precaution not to get infected. One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds. Once, when a country like South Korea dumps the dollar, the still unsold US Treasuries in the asset column of Asian central banks - US$2,000 billion according to some estimates - will collapse. The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries' exports to America will dry up, which in turn will spread the global economic downturn like wildfire.

After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market. The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.

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Who the hell runs this country???

No-one. That's the scary thing.

There are a lot of posers beating their chests in the wheel-house, but the rudder came adrift years ago and there's no-one in the engine room. And even if they was, the posers would be too scared to steer because that would require taking responsibility if they crashed.

By merely reacting rather than acting, they can pass the buck.

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No-one. That's the scary thing.

There are a lot of posers beating their chests in the wheel-house, but the rudder came adrift years ago and there's no-one in the engine room. And even if they was, the posers would be too scared to steer because that would require taking responsibility if they crashed.

By merely reacting rather than acting, they can pass the buck.

Heh heh heh. Nice analogy.

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The text of Mervyn's speech is here:

http://www.bankofengland.co.uk/publication...5/speech256.pdf

I particularly like this bit:

"There has grown up in recent years a false sense of our ability to maintain a smooth and steady growth rate of output. So it is important to understand what monetary policy can do and what it cannot ... For the UK economy, monetary policy cannot ensure that output will grow at a constant rate. But in the medium term it can deliver low and stable inflation."

Twice in one paragraph: don't expect monetary policy to keep the economy growing nicely.

A clear disclaimer that the state of the economy is only the Bank's problem in so far as it affects inflation.

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The upshot of our self delusion?

Economy grows 9.4% in 1st nine months

(AP)

Updated: 2005-10-11 14:04

China's economy grew a blistering 9.4 percent in the first nine months of this year compared to the same period a year ago, and is forecast to expand 9.2 percent for the entire year, the country's top planning agency said.

However, growth is expected to slow to about 8.5 percent next year, the National Development and Reform Commission said in a report published in the China Securities Journal on Tuesday.

China will release official third quarter gross domestic product figures later this month.

Spending on big construction projects remains a key driver of growth; strong increases in exports are another, the report said.

It noted that growth in exports was likely to top 30 percent year-on-year in the first nine months of the year, with growth for the year predicted at about 25 percent. Imports will rise by a more modest 18 percent, leaving a record total trade surplus for the year of US$79 billion, the report forecast.

The report by China's main planning agency is largely in line with forecasts by international groups such as the World Bank, which recently issued an estimate for 9 percent growth for 2005.

China's economy grew 9.5 percent in the first half of this year and expanded by more than 9 percent in 2003 and 2004.

The commission said the government would continue to adjust levels of investment in property development and other construction to help keep growth at a reasonable level, while encouraging growth in domestic consumption, such as retail spending.

http://www.chinadaily.com.cn/english/doc/2...tent_484049.htm

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This is old news to HPCers, but still the country behaves as if nothing were wrong. There are many words for those who will refuse to see the significance of King's words. "Stupid" is merely the most prosaic.

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The text of Mervyn's speech is here:

http://www.bankofengland.co.uk/publication...5/speech256.pdf

I particularly like this bit:

"There has grown up in recent years a false sense of our ability to maintain a smooth and steady growth rate of output. So it is important to understand what monetary policy can do and what it cannot ... For the UK economy, monetary policy cannot ensure that output will grow at a constant rate. But in the medium term it can deliver low and stable inflation."

Twice in one paragraph: don't expect monetary policy to keep the economy growing nicely.

A clear disclaimer that the state of the economy is only the Bank's problem in so far as it affects inflation.

Cheers for that link. I agree with you. The way the speech finishes seems to say that.

It will be very interesting to see the inflation report and the minutes for last month to see if the stooges really are just.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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