If you are new to this blog, you are invited to read first “The Largest Heist in History” which was accepted as evidence and published by the British Parliament, House of Commons, Treasury Committee.

"It is typically characterised by strong, compelling, logic. I loosely use the term 'pyramid selling' to describe the activities of the City but you explain in crystal clear terms why this is so." commented Dr Vincent Cable MP to the author.

This blog demonstrates that:

- the financial system was turned into a pyramid scheme in a technical, legal sense (not just proverbial);

- the current crisis was easily predictable (without any benefit of hindsight) by any competent financier, i.e. with rudimentary knowledge of mathematics, hence avoidable.

It is up to readers to draw their own conclusions. Whether this crisis is a result of a conspiracy to defraud taxpayers, or a massive negligence, or it is just a misfortune, or maybe a Swedish count, Axel Oxenstierna, was right when he said to his son in the 17th century: "Do you not know, my son, with how little wisdom the world is governed?".

Tuesday, 26 January 2010

UK bogus growth?


Today UK has been reported to have 0.1% growth in the last quarter of 2009.

The UK GDP in 2009 was, circa, £1,460 billion. 0.1% of it (i.e. growth) is £1.46 billion.

Now, let us take the quantitative easing, i.e. printing money, into account. It does not represent any growth at all. It has totalled £200 billion. Therefore, in reality unless this 0.1% growth is adjusted for the effect of quantitative easing and the reports do not mention that, there was economy contraction of £198.54 billion, i.e. shocking 13.6% of GDP. This does not take into account when money printing took place but is a good estimate nevertheless.

I hope the ministers and mainstream financial commentators explain this.

PLEASE READ EXCHANGE OF COMMENTS BELOW THAT GIVES FULL PERSPECTIVE ON THIS SHOCKING FIGURE.

20 comments:

  1. Your point is broadly right but you're overegging the figures. Half of the QE will never get into the economy, so its nearer £100bn over the last 12 months, about 6% of GDP, as a temporary stimulus. If it doesnt produce string inflationary effects, and it might not, then expect a further GDP contraction of the order of 3% next year. The real contraction over the course of the recession is nearer 15% than the 6% that is quoted in the press. You'll never get a journalist to understand or with the desire to explain since careers depend on good news stories. Just look at how Peston was vilified for stating the obvious.

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  2. @3769michael:

    Thanks for reading my blog.

    I think you missed something in my analysis, and I think we are getting the same result. As my calculations put £200 bn on the last quarter they result in 13.6% for the quarter. However they should be annualised. Doing a good estimate, I get 16.9% which is within your range of 15%.

    So I think we got to the same result. . It would be great if so-called experts could have explained this in detail.

    Best

    Greg

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  3. Isn't GDP growth adjusted to take into account inflation and therefore the QE?

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  4. @MikieB:

    precisely. I suspect your "therefore" reasoning may not be entirely correct. This is what I want to know for sure. That's why I put a question mark in the title.

    Let's see whether anyone on a tely tonight will address this point.

    Best

    Greg

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  5. OOps

    I see that Greg Pytel on his blog has answered my question,

    Silly me.

    Time for the tin foil helmets and lifeboats.

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  6. You don't understand economics. QE isn't factored into the GDP figures, all they are doing is buying back bonds from financial institutions - this has the effect of diluting the value of the pound so if you want an accurate abstract figure you would do (£total/(£total+£QE)*GDP however due to being a fiat currency the value is determined by world markets and not any inherent value.

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  7. Thanks Robert. This is not a complete explanation. Maybe I do not understand economics but whether in economics, engineering, physics, accounting or chemistry I believe the figures must add up to make sense. And economists are quite often devoid of such skills (let alone being able to calculate an interest or growth of periods more complex than a year).

    Presumably "they" (I assume you mean BoE) are buying bonds that no one else would buy (otherwise why would they be doing that). Therefore these bonds are not worth that much. These bonds are not legal tenders and could not find their way on the market circulating in the economy. The money which is printed finds its way therefore it must have effect on GDP.

    I am sorry maybe I believed the economists who argued for quantitative easing by saying that it would, surprise, surprise, increase GDP.

    Best

    Greg

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  8. Robert, I have just used your formula (£Total/(£Total + £QE)). £Total in my calculation are M1, demand deposits, which are of the same circulation status as £QE. £Total is £1,060bn. £QE is £200bn, giving 0.84 result of your formula, giving a dilution – or contraction - of 1 – 0.84 = 0.16, which in percentage terms 16%.

    I am not surprised that this figure 16% of wealth dilution, according to your formula, coincides with my calculations of the GDP contraction. As I stated in my previous response figures must add up.

    Best

    Greg

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  9. Perhaps John Williams at shadowstats.com would have a more definitive answer, at least from a US perspective.

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  10. >Robert said...
    >You don't understand economics. QE isn't factored into the GDP
    >figures, all they are doing is buying back bonds from financial
    >institutions -

    Actually, the bank of england is printing the money to buy gilts off the government. This means the Bank of England is essentially printing money, giving it to the government so the government can spend it, as their operating deficit is £240bn per year.

    So yes, the QE _is_ factored in.

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  11. Robert is correct in saying that QE has nothing to do with GDP measurements: it simply involves, as Robert says, “buying back bonds from financial institutions”. When someone buys a house (other than a new one) the price they pay is not added to GDP (though the costs of the sale, e.g. estate agent’s, commission IS added).

    Mid Wales Bloginator is not correct to say that “the Bank of England is printing the money to buy gilts off the government”. As I understand it, they are not allowed to do this by European law. What the B.o E. DOES do, as Robert points out, is to buy the bonds off institutions (or any individuals willing to sell). Of course this amounts to exactly the same thing as buying direct from government, but rules are rules.

    Also Mid Wales Bloginator is not correct to say QE has anything to do with financing the deficit: these are two different things. E.g. one could quite easily do some Q.E. while running no deficit at all.

    For what it is worth, there is a German academic whose description of QE matches mine. See p. 22, para starting “In the current crisis....” here: http://www.economics-ejournal.org/economics/discussionpapers/2010-1

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  12. Thanks for comment Ralph: you wrote: "B.o E. DOES do, as Robert points out, is to buy the bonds off institutions (or any individuals willing to sell)." I guess they do it with newly printed money as nobody else does. (Otherwise why would they do it?) So BoE is buying worthless junk.

    I do not feel convinced by your explanation that QE does not find its way to GDP. At very least it dilutes the value of the pound and since GDP is measured in pounds you have to discount the GDP growth with such dilution. It leads to the same result as I showed above.

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  13. Ralph, BTW if QE does not find its way into GDP, why did the government do it then? This must be a complete and pointless waste then.

    Something does not stuck up with your explanation.

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  14. Greg: You say in your first para, “they do it with newly printed money” Agreed. You then say “So BoE is buying worthless junk”. I don’t agree with that. For every £X they spend, they ought to get gilts the market price of which is very near £X.

    Re your second para, I don’t agree that the value of the pound is “diluted” (even though there are a lot more pounds in existence (monetary base to be exact)). If you mean “dilute” in the sense of money losing its value because of inflation, we had the usual 2% or so inflation since QE began, so there is not much dilution or loss of value yet. There might be in the future if the additional money stokes inflation and the government / BoE fail to take suitable deflationary counter measures.

    The other sense in which I suspect you might be using the word dilute is some sort of assumption that because the total stock of money increases, this has something to do with GDP, i.e. the total turnover of money (and goods and services). The two are entirely separate.

    For example you could have an expanding GDP at the same time as a contraction in the total money supply if the velocity of circulation of money rose by a suitable amount. Changes in the velocity can be dramatic: velocity fell by about 75% in New York between about 1929 and 1931. My source for that is an article by Rees-Mogg in The Times.

    Re your second comment, you say “if QE does not find its way into GDP, why did the government do it then? This must be a complete and pointless waste then.” You hit the nail on the head !!! It HAS been pretty much of a waste of time. I predicted just over a year ago that it wouldn’t have much effect. See here.

    http://printingmoneyisgood.blogspot.com/

    I’m planning to make some even more scathing and sarcastic comments about QE here in a day or two.

    http://ralphanomics.blogspot.com/

    A large portion of the money from QE (certainly in the US) is sitting around doing nothing, that is US bank reserves have shot up to totally unprecedented levels. There is a chart depicting this here:


    http://www.scribd.com/doc/24302364/NY-Fed-Excess-Reserves

    (scroll down to second page of the article in the left).

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  15. Ralph:

    1. If BoE is not buying worthless junk (I mean they buy financial products at a market price), then BoE must stop it and let the markets provide additional liquidity. Basically I read your argument that BoE must not have been doing so. But I doubt you are correct since, if you were, it would have contradicted the fact that there was a “credit crunch” (i.e. cash shortage).

    2. Inflation argument does not convince me at all: printing extra money is dilution in a similar way as printing shares. This is a matter of fact. If there was 2% inflation with QE, there could have been -2% without it (deflation is also a natural economic phenomenon although we may not like it). Additionally, which is also beyond my point but practically important, the newly printed money might not hove given a full impact yet on consumers markets (hence it may not be reflected by the current inflation). Quite probable as the banks, repairing their liquidity position, are sitting on cash.

    You wrote: “Re your second comment, you say “if QE does not find its way into GDP, why did the government do it then? This must be a complete and pointless waste then.” You hit the nail on the head !!! It HAS been pretty much of a waste of time. I predicted just over a year ago that it wouldn’t have much effect.”

    If you are correct, my sincere congratulations! However one way (I am correct) or another (you are correct), it all does not look too good. Doesn’t it?

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  16. Hi Greg. I’ll take some of your points in turn.

    Re “If BoE is not buying worthless junk...”. My answer is that it buys bonds (mainly gilts) at market price. And market price is market price. You can argue that a piece of furniture is “really” worth less than £x, but if it changes hands for £x, then £x is the market price (in the absence of a rigged market).

    In the first half of your item “2” you assume that printing extra money AUTOMATICALLY leads to inflation. I don’t agree: it all depends on what people do with the extra money. To take an extreme example if the BoE prints an extra trillion trillion pounds and hides it down a disused mine, and doesn’t tell anyone what it has done, there’d be no effect on anything (apart from a rise in demand for ink and paper).

    What happened in 2009 was that people did precious little with the extra money. If people do nothing with the extra money, the money has no effect – UNLESS, and this is big “unless”, everyone assumes that extra money will automatically lead to inflation. This can lead to self fulfilling prophesy: inflation. When economists use the phrase “inflationary expectations”, they are referring to something of this nature.
    Shares are a bit different: their value is determined by the likely dividend and net assets. If a company doubles the number of shares and total profits and dividend and net assets are expected to remain about constant, the obviously the share value halves, approximately.

    You say “Quite probable as the banks, repairing their liquidity position, are sitting on cash.” I agree. Banks ARE worried about their balance sheets, and this partially explains the unprecedented rise in their reserves.

    You say “it all does not look too good. Doesn’t it?” Certainly some blunders have been made, I think. There are plenty of bloggers who clearly know a lot about economics who think that, 1, the average politician is clueless on economics. (Alistair Darling knows his stuff while Cameron is clueless). 2, its even doubtful to what extent Bernanke and other central bankers basically understand what they are doing.

    A serious double dip in the U.S. will not surprise me. Serious inflation in two years time won’t surprise me. But hopefully we can avoid these.

    Milton Friedman thought that governments and central banks were so hopeless at dealing with booms and recessions that it would be better if they didn’t try!

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  17. Ralph: thanks for response. I leave better qualified in details of economy to judge all arguments. As I hope you understand my arguments on the current crisis are based on rules of complexity (i.e. if you multiply your liability to infinity with exponential growth to underlying base of your reserves it is technically a pyramid bound to collapse). This article was auxiliary and I am really grateful for all the comments. (Especially yours as they were detailed and extensive.)

    As a matter of record:

    1. If BoE is spending the printed money to buy all these financial papers which present a real market value then the whole exercise is idiotic. BoE should not do it and let the market provide this additional liquidity. (But I am afraid it is not that simple. I think these papers hold what you call "market price" because BoE provides additional liquidity through QE. That's what allows you to say it is a market price. However if BoE did not do QE, these prices would have collapsed to the floor. This is the mechanism that I think you ignored but which is a silent justification of QE.)

    2. It should be clear that I do not "assume that printing extra money AUTOMATICALLY leads to inflation": it is more complex than that. The speed of circulation and money multiplier also play key roles. Quantitatively it is a bit too complex to analyse on the blog (and not all necessary date is available). So I finish with an arbitrary statement that printing cash is bad. If I am not correct, let us all do this at home tomorrow. We will all be rich: unemployment will be irrelevant, we will sort it put with printing cash.

    Best

    Greg

    ReplyDelete
  18. This news/analysis published in the last Friday's Evening Standard is dedicated to those who still believe that 0.1% growth is not in fact bogus:

    http://www.thisislondon.co.uk/standard-business/article-23802791-market-report-traders-in-a-grim-mood-as-uk-loses-life-support-system.do

    ReplyDelete
  19. The UK economy is at a dangerous tipping point. Massive public indebtedness occurred as a result of the government's bailout of its banks, yet businesses remain afflicted by a severe credit crunch.
    UK financial crisis

    ReplyDelete
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    ReplyDelete