Wednesday, Apr 08, 2015

Biggest current account deficit since 1948 - do they really care?

Grauniad: Bank of England warning over current account deficit

Economic unreality continues apace as the deficit on current account reaches 6% of GDP. the 'Financial Policy Comittee' of the Bank of England appear to say this is bad news not in itself but because investors might see it as a bad sign. They also say it has not been matched by credit expansion - as if that could make things more sustainable. Finally, and of more interest to this site, they note that although household debt has not risen since December, BTL investors are increasingly using interest only mortgages. The significance of this is not discussed.

Posted by nickb @ 12:21 PM (3501 views)
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1. cyril said...

The current account deficit was covered on FT Alphaville but it's so complicated it runs to 9 separate articles so I gave up. It's something to do with the fact that foreign investors in the UK make more than UK investors do on foreign investments. As usual these days everything is disguised with financial jiggery pokery so nobody knows what's going on. Least of all the FPC I suspect.

Wednesday, April 8, 2015 12:45PM Report Comment

2. doomwatch said...

"For the 2014 year as a whole, the deficit totalled £98bn, equal to 5.5% of GDP - the biggest deficit since records began in 1948."

Strange, listening to the Tories over the last week or so, the economy seems to be their single plank for vote winning.
Crumbs, if this is their only vote winner, they really are in bad shape , and haven't handled the UK economy
as successfully as they ball/drone on about.

Wednesday, April 8, 2015 01:19PM Report Comment

3. khards said...

Another Sterling devaluation is a certainty given that the current government didn't want to join the Euro for the reason that it would take devaluation away from them.
I reckon were somewhere near April 2007, not long to go - Take that trip to euro land whilst you can.

Wednesday, April 8, 2015 02:24PM Report Comment

4. taffee said...

When the tiresome in the first thing they did was budget because our finances were almost
As bad as Greece...since then debt is now £1.5 trillion..deficit is still approaching £90 billion. And every year hmg
Has spent.more money than the last...there is no real austerity and no effort made to really tackle.the deficit

During.g this time they Introduced mad policies to prop.up the housing bubble.despite the same thing in U.S.
Almost bought the system.down with government guaranteeing subprime mortgages via
Freddie Mac and Fannie may

You really have to ask what the f**k is going on?

Wednesday, April 8, 2015 02:39PM Report Comment

5. taffee said...


When the tories first got in...predictive text

Wednesday, April 8, 2015 02:41PM Report Comment

6. doomwatch said...

Taff, on this occasion the predictive text got it right; they are tiresome and simply the political wing
of the land owning class. Always were, always will be.

Wednesday, April 8, 2015 02:49PM Report Comment

7. reticent said...

The current account deficit is the trade deficit. National accounting requires that it is matched by a capital account surplus (plus or minus any changes in foreign exchange reserves), which is what the reference to international investments is all about.

Essentially, we have been borrowing from the rest of the world to finance consumption of foreign goods for aeons and we then had a ton of monetary stimulus and output growth at a time when all the countries we export to (mostly the EU) were on their knees. Our trade gap inevitably widened even further as we had a mini-boom that our neighbours didn't.

Put another way, foreigners have been plowing money into the UK throughout the recession allowing us to import more consumer goods relative to the amount we were exporting than even before the recession.

If this sounds like a macroeconomic mumbo-jumbo way of saying what many here have been saying for ages, that the recovery is a debt-fuelled mirage built on sand, that's because that's essentially what it is. It's just that it's more a question of the UK as a whole, borrowing too much by way of capital investment which finances the trade deficit, as opposed to UK consumers borrowing too much. Although, as they say, that is a concern that they are keeping an eye on.

Basically, our currency (and implicitly, our national stock) is overvalued. There will be a reckoning to be paid for that, possibly by way of what's called a "balance of payments crisis", because foreigners are investing in the UK in an outsize proportion to what we actually produce and we are importing more from other countries than can feasibly be sustained in the longterm.

How much this is an indictment of QE and an economic system that arguably encourages rent-seeking speculation more than innovation and productivity is anyone's guess, but my ignorant gut-feeling would probably be "a lot".

Worst case scenario: the pound plummets and we have a recession. The reason it is a crisis rather than the sort of readjustment you associate with currencies rebalancing to gradually adjust trade deficits, is that the foreign money can dry up very suddenly. Investment goes down, domestic consumption of foreign goods goes down, but domestic consumption of domestic goods goes down with it and it takes a while for foreign consumption of domestic goods to react to the drop in currency, so initially, export revenue falls.

The most obvious example of foreign investment I know of is that most of the big housing developments in London are financed with foreign (mostly asian) money, and then sold off to foreign (mostly asian) investors (buying houses is the only kind of residential investment that counts as investment in national accounting).

Wednesday, April 8, 2015 02:49PM Report Comment

8. mister ed said...

Starting at 23:05 there's a great question, followed by a waffling, smokescreen answer by the Tory Michael Gove, followed by an excellent riposte by journalist Peter Hitchens which tells the truth of the matter.

Wednesday, April 8, 2015 03:49PM Report Comment

9. Dharmin said...

Worth reading :-

Paul Hodges: UK house prices could fall 50% in global ‘Great Unwinding’

Wednesday, April 8, 2015 07:00PM Report Comment

10. britishblue said...

There must be a number of Tories that would privately like to hand the reigns over to Milliband and then hope this whole thing blows up under his tenure. The can kicking has been amazing so far, but can it last another 5 years whoever is in power?

Wednesday, April 8, 2015 07:05PM Report Comment

11. khards said...

@britishblue - I'm not sure about that. I think the Tories actually believe the propaganda they peddle. They really do believe that the 302 of them can really influence the economy and that their smoke and mirrors recovery is real.

Wednesday, April 8, 2015 07:59PM Report Comment

12. mister ed said...

Very good point, britishblue.

It could be that no party actually wants to win the election, because it would mean inheriting a train wreck of an economy. And whichever party is in power when it collapses would then stand no chance of being elected again for at least a generation.

Wednesday, April 8, 2015 08:06PM Report Comment

13. reticent said...

@9, 11


There is this idea on this site that the next recession will be some sort of financial armageddon that will dwarf the last one. There is also a paranoid assumption that everyone in power or banking knows it and is desperate to keep a lid on it but can only postpone the inevitable.

Here's a few more plausible predictions:

1. The next recession won't be as deep as the last, simply because that was the deepest since the 1930s.
2. The various financial time bombs left undefused by the response to the crisis won't all go off at once.
3. The next house price correction could easily be deeper than the last, but only bring with it half as much of a contraction in GDP.
4. Many of the injustices and imbalances that look unsustainable to outsiders who post on blogs will carry on far longer than any of us would expect simply because a majority of people who are aware of them are profiting from them too much to see them as injustices and imbalances that will inevitably be put right and people who don't work in finance, politics or post on blogs don't give a s*&$.

Of the few decent politicians I've heard of who seem to genuinely understand the lack of social usefulness of a vast banking sector and permanently low rates, they are not so much worried about some hideous collapse as a gradual erosion of social cohesion brought about by ever-increasing inequality.

Having spoken to a great many card-carrying Tories who work in the city, I can assure you, if you tell them the UK financial system is going to blow up some day soon, they will look at you like you're a fool who will die poor. The idea that the politicians from either camp think any different is pretty fanciful, since those are the sort of people they ask for advice on such matters.

Wednesday, April 8, 2015 10:27PM Report Comment

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15. britishblue said...

Reticent @12. actually I do seriously believe this and so do many others. I am sure if you told many of these politicians 5 years ago that you would need to start paying banks to hold your money with negative interests rates, they would have laughed you out of the room. Or if you had told them that China would set up a bank that would eventually rival the world bank and Britain, against Americans orders, would join it. The idea of taking advice from a card carrying Tory city banker doesn't fill me with awe, but that's just me.

Thursday, April 9, 2015 08:10AM Report Comment

16. reticent said...

Negative rates will unravel on a case-by-case basis since currency valuations are relative. If all currencies collapsed overnight by the same amount, rates would still be very much the same.

In any case, we don't have negative rates in this country, presumably because we have a massive trade deficit and an overvalued currency relative to Switzerland and Denmark.

"The idea of taking advice from a card carrying Tory city banker doesn't fill me with awe, but that's just me."

I said politicians take advice from card-carrying Tories bankers. I didn't say I did. Is that what you mean? I discuss the sort of things we discuss here with people like that whenever I meet one. Believe me, all they see is a vast industry funnelling a huge chunk of the world's wealth towards greater wealth, enriching themselves and all their colleagues in the process and they don't see any way this process could ever end.

You seem to be assuming that politicians have a pretty awe-inspiring capacity to foresee black swan events. They don't. No one can tell you with any degree of confidence what will reverse the decline of interest rates. Last time the base rate went down to 2%, it stayed there for almost 20 years. It took the aftermath of a world war to generate a recovery sustainable enough to return rates to their normal levels. I doubt even Keynes saw that coming.

Thursday, April 9, 2015 10:27AM Report Comment

17. taffee said...

I remember Andy Hornsby questioned over state of hbos by Preston I think(not sure)....he had no idea why
People would question the viability of hbos....I think he genuinely had no idea what was coming....even got his manager
And directors to buy millions of shares on the back of a 'reassuring' statement to the market.

Of course underlying problems were identified the market who.started to sell the shares is history

The real problem in uk is similar In that the financial situation is so dire that anything could make the market turn
Against sterling and it would happen very quickly which is why government spent sleepless nights
Making sure we never got into current economic lunacy of props...debt zero rates and money printing

Finally post war there was austerity...serious austerity...since 2010 we have spent more money each year every
Year much of which on the same crazy bloated excessives as before

Thursday, April 9, 2015 10:47AM Report Comment

18. nickb said...

Agree with reticent on how politicians (or at least those with their hands on the reins) see the economy and why. However, let's not forget that Britain was an exception in not allowing a major house price correction in countries that had seen large bouts of asset price inflation to 2007, whilst the relationship between politicians and the inflated financial sector was the same in those other countries. That includes the USA which is a monetary sovereign unlike the Eurozone countries. So there has to be some other X factor if Britain is able to hold out far longer. Secondly, I doubt that there can be a major house price correction in the UK without major economic repercussions. Because our money supply is to a very large extent tied to mortgage credit creation (at least 55% of M4L consists of mortgage credit in each year from 1963 if memory serves me right and on average it's well over 60%. Can easily be checked via Bank of England website), because of our bloated financial sector relative to the productive economy.

Thursday, April 9, 2015 11:21AM Report Comment

19. mister ed said...

I don’t know about other people on the site. I don’t believe we’re facing financial Armageddon.

The thing is that it doesn’t need to be financial Armageddon to make a political party very unpopular. All it needs is a noticeable fall in living standards, or even just a feeling among people that they aren’t as rich, especially if that involves a fall in house prices :-)

Sure some politicians are in la-la land, and actually do believe their own propaganda. But I think most politicians know that no matter which party wins the election, they’re going to have to make tax rises and spending cuts (perhaps quite savage spending cuts) to at least try to balance the books.

Then again, the next lot in power might just find a way to kick the can down the road a bit further and then hope someone else is in power when things go awry.

Thursday, April 9, 2015 11:49AM Report Comment

20. nickb said...

@mr ed.
I agree that is probably what they will do; disagree that they have to do it. Governments just don't balance the books. Look at the USA, hasn't run a surplus since the 1970s. Plus, all debt cannot be repaid; if it did there would be no money circulating in the economy. I don't see why public sector debt should be singled out as bad, especially since the government / BofE complex can always resort to tricks like QE to enable backdoor deficit financing (or in extremis, front-door viaBrexit). The current account deficit matters a lot more than the government fiscal deficit, IMHO since we actually have to earn foreign currency to import goods.

Thursday, April 9, 2015 05:27PM Report Comment

21. reticent said...

"Exception in not allowing a major house price correction"

How so? ZIRP was everywhere. The Europeans may have eschewed QE initially, but everyone was doing what they could to stop asset prices falling.

In spite of the govt.'s efforts, HPs fell 20% on pretty much every index. Maybe ZIRP had more effect here because of the prevalence of trackers and because our base rate feeds through to mortgage rates than other country's equivalents. We also don't have jingle mail (non-recourse mortgages) like in the US. Perhaps the other countries did less lender forbearance than us (we did tons - there were significantly less repossessions post-2007 than there were before).

Certainly, HPs would have fallen a lot more in the absence of that, but I don't think we were particularly innovative in those regards. HTB was a novelty. Applying FLS to mortgages was probably unique too, although I doubt FLS itself was. But these things came later once the market had been stagnant for a couple of years.

"55% of M4L..."


"The current account deficit matters a lot more than the government fiscal deficit, IMHO since we actually have to earn foreign currency to import goods."

Bingo. Amazing how much the credit card analogies get trotted out by the Lib Dems and Tories when these are completely macro economically illiterate.

Friday, April 10, 2015 02:33PM Report Comment

22. reticent said...

"I think most politicians know that no matter which party wins the election, they’re going to have to make tax rises and spending cuts"

I can guarantee you that they know they will only get a ministerial salary if they get elected and shadow cabinet posts pay diddly-squat.

I meant to include this quote in an earlier post and I guess it's relevant here...

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" Upton Sinclair

Friday, April 10, 2015 02:40PM Report Comment

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