Quantitative Easing/UK Economy

Quantitative Easing and the UK Economy

Quantitative Easing = Printing more money = falling £v$ = higher commodity prices = inflation = erosion of savings = less consumer spending = lower GDP. The cycle used to be broken by higher wages with the inflation bit. That used to to inflate our debt away as wages went up. The problem now is that we have to hold down public sector wages and the private sector is now competitively linked to to unemployment and global labour rates. Expect higher fuel prices and imported foods. On the plus side the lower £ is good for exporters such as service sector and manufacturing, so they should be able to employ more which should add to GDP. So, bad for retailers but good for financial services and manufacturers.

Moodys downgrade our banks. Moody’s have effectively stuffed the UK. Disgraceful. Government pumps in £75bn, Moody downgrades banks by 3 notches…..money goes up in puff of smoke. Sometimes I feel ratings agencies should be closed down, not least because of their role in causing this crisis in the first place. The timing of their pronouncements is extremely suspect. While we are at it, can we add the BBC to that least of “come the revolution”? Yes it’s grim out there but people are intent on pushing agendas.

The downgrades were as follows:

• Lloyds TSB and Santander UK were downgraded one notch from an Aa3 ratings to an A1
• Royal Bank of Scotland and Nationwide were downgraded two notches from Aa3 to A2
• Co-Operative bank was downgraded from A2 to A3.
• Newcastle building society, Norwich and Peterborough building society, Nottingham building society, Principality building society, Skipton building society, West Brom building society and Yorkshire building society were all downgraded between 1 and 5 notches each.
• Barclays Bank PLC was not downgraded but left at Aa3

Why were the Credit Ratings Cut?*

The ratings were cut because Moody’s now considers these banks to be at a higher risk of defaulting than they were before. However, Moody’s were quick to point out that the downgrade did not “reflect a deterioration in the financial strength of the banking system,” and went on to say that ‘The downgrades have been caused by Moody’s reassessment of the support environment in the UK which has resulted in the removal of systemic support for seven smaller institutions and the reduction of systemic support… for five larger, more systemically important financial institutions.’

In short, Moody’s is of the opinion that the British government has removed some support to the banking sector making a default slightly more likely if things go wrong. Elisabeth Rudman, senior vice president at Moody’s said after the downgrade: “Compared to their European peers the UK banks are well positioned from a capital perspective. But the environment they are operating in is still very tough and there’s an awful lot of uncertainty out there in the euro zone.” Banks and building societies involved in the downgrade were quick to emphasise this point. A spokesperson from the Building Society Association commented: “It does not represent any change in financial strength and it is business as usual across the sector”. The Chancellor of the Exchequer George Osborne, in an interview with BBC Radio 4’s Today programme said that he was ‘confident that British banks are well capitalised, they are liquid, they are not experiencing the kinds of problems that
some of the banks in the eurozone are experiencing at the moment.’

Impacts of the Downgrade*

In truth the immediate impact shouldn’t be too extensive. The most recent round of quantitative easing announced by the Bank of England should inject enough cash into the banks to counteract the rising cost of the banks borrowing money thanks to their new lower credit ratings. Any effects are likely to be seen in a drying up in credit for smaller businesses. There have been calls from the Lib Dems to nationalise RBS completely so that they can sidestep this problem by forcing the bank to lend to smaller businesses and encourage economic growth. This however is unlikely.

The greatest and most immediate affect the downgrade will have is summed up by Jason Riddle, founder of campaign group save our savers: “The downgrade of 12 banks and building societies will further undermine savers’ faith in the banking system.” With the memory of 2008 still fresh in everyone’s memory and dissatisfaction with banker’s wages and bonuses; people are beginning to lose patience with the problematic banks.

* with some excerpts from SVS CFD Securities report

Having said that I think Moody’s have a point to downgrade UK banks. The Bank of England is giving the banks monopoly money to pump into the economy and strengthen their balance sheets. The government are deliberately devaluing the £ to make our exports more competitive and our imports more expensive. They are trying to inflate our way out of debt. You can’t expect to devalue your currency without devaluing your assets – in this case banks. I believe it was Harold Wilson who devalued the £ and said ‘This won’t effect the £ in your pocket’ – except when you go to the supermarket or pay your fuel bills hmm

And its not just the United Kingdom…In the USA we have an Armageddon looming and the debt bomb keeps ticking…

In 2009 US debt was $12 trillion, it has grown 23% to $14.8 trillion in just 2 years. If it grows at the same rate it will hit $18.2 trillion in 2 years, (almost double the 2008 level) their new debt ceiling is set at $16.4 trillion and maybe hit in just 12 months if my calculator is right? If they are spending $1.3 trillion more than they are earning how can they reduce debt? Tick tock!