jka on economics UK

UK unemployment hits 2 million - we compare cycles

The number of people claiming jobless benefit increased by 74,000 in January to 1.233 million according to the Office for National Statistics ONS.

The broader Labour Force Survey measure indicated a rise of 146,000 in unemployment in the three months to December to 1.971 million as the unemployment rate rose to 6.3%.

Through 2009, it seems likely the claimant count and the LFS count will rise by between 750,000 and 900,000, pushing the unemployment rate to between 8.7% and 9.2%.

The headline rate of unemployment seems likely to hit between 2.75 and 3.00 million by the end of the year rising by a further 350,000 in 2010. In the second chart we compare the patterns of unemployment with the 1980 and 1990 cycle.

ONS Labour Market Statistics

Mary Poppins and the UK banking crisis

It had never occurred to me the Wizard of Oz was an allegory for the US depression of the 1930’s. The yellow brick road a reference to the Gold Standard, the scarecrow representative of plight of the US farmers and more. Imagine how surprised then to realise Mary Poppins was a prophetic allegory of the UK Banking crisis of 2008.

It really should have been obvious. The script included a run on the bank, lots of kite flying, the bottomless carpet bag, the credit crunch explosion from the fireworks of Admiral Boom, a run on the bank. It really is all there.

The film begins with the young and pretty Mary Poppins perched on a cloud high above London in Spring 1910 observing events below. Mary Poppins is the Chancellor of the Exchequer.  The action descends to earth where Bert, a cockney jack-of-all-trades is performing as a one-man band at the park entrance. After the end of the show, he strolls down the street and introduces the audience to the well-to-do, but troubled, Banks family. (Bert the cockney chimney sweep obviously the Treasury.)

The Banks family is the British banking system headed by the cold and aloof Mr. Banks, who has formed the idea that a British household ought to be run with the strict authority of a British bank. [A clear reference to moral hazard]. Mr Banks is the Bank of England or the Governor of the Bank of England himself. His wife is the loving and spirited but highly distracted suffragette Mrs. Banks, (the FSA).

As the script develops, the Banks' latest nanny quits out of exasperation after the Banks' children, Jane and Michael run off in pursuit of a wayward kite. The Banks' latest nanny is the FSA supervisor, the kite flying an obvious reference to off balance sheet activity relating to highly leveraged transactions, sub prime debt, CDO's, SIV’s, toxic debt etc.

The bank crisis develops as Michael one of the Banks' siblings refuses to deposit his tuppence with the Dawes bank, a misunderstanding develops and a run on the bank ensues. Obviously the Dawes bank is Northern rock, the tuppence, wholesale funding and Michael and Jane representative of the major clearers.   

Pyrothecnics ensue as the fireworks from Admiral Boom explode above the roof tops of London. The reference to Boom and bust so obvious, the credit crunch impacts, I can’t believe I missed this.    

The crisis abates as Michael puts his tuppence into Northern Rock, Mary Poppins uses her bottomless carpet bag to inject liquidity into the system and re-capitalise the Banks family.

In the film, the next morning, the winds have changed direction, and so Mary must depart. Mr. Banks, now loving and joyful, reappears with the now-mended kite and cheerfully summons his children. The greatly-relieved Mrs. Banks supplies a tail for the kite, using one of her suffragette ribbons. In the park with the children and other kite-flyers, Mr. Banks meets Mr. Dawes Jr.. Mary Poppins her work now done, takes to the air with a fond farewell from Bert.

So there you have it. It’s all going to be OK.

[some script extracts from Wikepedia ]

Euro rates heading higher

Jean-Claude Trichet as president of the ECB delivered a bombshell last week by suggesting interest rates would have to rise to combat the threat of inflation. Quelle surprise.

Euroland inflation has risen to 3.6% and is set to go higher. The mandate of maintaining inflation around the 2% level is clearly challenged. The ECB had stood firm on holding rates as Berbanke slashed rates in the US and in the UK the Bank of England eased slightly to avoid the worst effects of the credit crunch.

But last week the ECB indicated it could decide to raise rates by a small amount at the next meeting to secure the “solid anchoring of inflation expectations”. Analysts interpreted this to mean that rates would rise to 4.25% in July.

The ECB had opted to maintain the low inflation priority even at the expense of growth. In the US Bernanke had recently noticed the Dollar decline and suggested action may be taken to reverse the process. US rates have been slashed from 5.25% to 2% but this comment from the Fed Chairman must mark the end of the rate cuts and the prospect of interest rate rises increases.

All of this adds to the dilemma in Threadneedle street. Inflation is rising and growth is slowing. In Europe and the US rates are set to rise. Last week the Bank of England held rates, following a middle way but it may not be able to follow a middle way much longer.

What's happening to the oil price?

Just what is happening to the oil price.

OK it is a finite resource controlled by a cartel with an inelastic price curve but even so. Last year OPEC were suggesting the realistic market price should be around $60 dollars.

Current speculation is that the price could even rise to $200 dollars a barrel by the end of the year after a near term test of the $150 dollar level soon as fundamentals work the price higher.

Some think, the fundamentals are irrelevant and the sharp price rise is a speculative bubble driven by hedge fund and other commodity dealers that is set to burst and soon.

Energy ministers from the Group of eight have urged OPEC to increase output to alleviate the price rise but OPEC can achieve little given the constraints to refining capacity.

China and India have been urged to remove subsidies to limit demand growth apparently by Sam Bodman the US energy secretary. No doubt he will be raising the gas price at the pumps in the US some time soon. But politically, any changes must be effected slowly.

Alternative energy options, greater utilisation effiencies, more resources become economic to recover as prices rise. All this will happen but take time.

In the short term, the energy costs are crippling the air line business, hitting haulage businesses pushing up delivery costs in all sectors, squeezing the horticulturalists. The spectre of stagflation is on the horizon. The price effects will filter into the wider economy quickly. Interest rates will have to rise to maintain a “real rate” momentum. Growth will slow as wealth is transferred to the OPEC group.

In reality, it is June, the price is rising without regard to the fundamentals. This looks like a speculative bubble which is set to pop. Let’s hope it happens soon.

Inflation Data July

UK inflation data suggests markets can chill about interest rate rises as CPI inflation fall to 1.9% in July. No need for the Governor of the Bank of England to write to the Chancellor again in the near future. It seems hard to believe the CPI rate was 3.1% just five months ago. Things may not be so rosy however, RPI inflation is still high at 3.8%. RPIX is falling to 2.7% from 3.3% prior month but the July figures were flattered by Food, Furniture and Furnishings. The so-called DFS effect of prices rising in June to be cut in the July sales. Of greater concern is that Service sector inflation in the month was 3.5%. (Average 3.7% over the last three years and 45% of the index weighting). Goods inflation of 0.5% is not sustainable into the future. This will put inflation higher towards the end of the year and into 2008.