Today we got the release on the state of the Labour market in the UK, and once again we can see that for all the claimed success by the Bank of England and government of their policies, unemployment really hasn’t budged for 4 years now.

From the release:

The employment rate for those aged from 16 to 64 was 71.4%, down 0.2 percentage points from October to December 2012 but up 0.8 percentage points from a year earlier. There were 29.71 million people in employment aged 16 and over, down 43,000 from October to December 2012 but up 434,000 from a year earlier.

The unemployment rate was 7.8% of the economically active population, up 0.1 percentage points from October to December 2012 but down 0.4 from a year earlier. There were 2.52 million unemployed people, up 15,000 from October to December 2012 but down 92,000 from a year earlier.

The inactivity rate for those aged from 16 to 64 was 22.4%, up 0.1 percentage points from October to December 2012 but down 0.6 from a year earlier. There were 9.00 million economically inactive people aged from 16 to 64, up 47,000 from October to December 2012 but down 212,000 from a year earlier.

And here is really the only chart that you need to show what an utter failure those policies have been:

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Despite all the money printing by the BoE claiming to help the UK economy the unemployment rate in the UK really hasn’t gone anywhere in 4 years.

And it’s not just bad news for people without jobs, those lucky enough to have a job have seen their wages squeezed by the most on record:

Total pay rose by 0.4% compared with January to March 2012; the growth rate has not been lower since March to May 2009. Regular pay rose by 0.8% over the same period, the lowest growth rate since comparable records began in 2001.

And:

Average weekly earnings excluding bonus payments rose by 0.8% comparing January to March 2013 with the same period a year earlier. This was the lowest growth rate since comparable records began in 2001. In March 2013 lower earnings growth was recorded across most sectors of the economy.

Average weekly earnings including bonus payments rose by 0.4% comparing January to March 2013 with the same period a year earlier. This growth rate has not been lower since March to May 2009 (when it was minus 0.6%). Some businesses responding to the Monthly Wages & Salaries Survey have reported that bonuses that would normally be paid in March are expected to be paid later. This partially explains the low growth rate for average weekly earnings including bonuses.

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Wage growth excluding bonuses is now lower than what it was during the 08/09 recession.

And finally as always it is the youngest in society that seem to be bearing the brunt of the pain:

The unemployment rate for 16 to 24 year olds was 20.7% for January to March 2013, down 0.1 percentage points from October to December 2012. In accordance with international guidelines, unemployment rates are calculated as the number of unemployed people divided by the economically active population (those in employment plus those who are unemployed). Increasing numbers of young people going into full-time education reduces the size of the economically active population and therefore increases the unemployment rate.

In accordance with international guidelines, people in full-time education (FTE) are included in the youth unemployment estimates if they have been looking for work within the last four weeks and are available to start work within the next two weeks. Excluding people in FTE, there were 668,000 unemployed 16 to 24 year olds for January to March 2013, up 18,000 from October to December 2012. The corresponding unemployment rate was 19.1% of the economically active population for 16 to 24 year olds not in FTE, up 0.7 percentage points from October to December 2012.

So here we are 4 years after being in one of the biggest recessions the country has ever seen and still the unemployment rate hovers around the 8% level – at what point do the BoE and chums admit their policies haven’t worked?

The UK’s unemployment rate hasn’t budged for 4 years now, as wage increases grow at slowest rate on record

From the report:

• Construction activity falls for sixth successive month 

• Civil engineering remains weakest performing sub-sector

• Slight decrease in new orders, but employment broadly stable

Downturn in business activity continues in April:

UK construction companies reported a continued downturn in business activity in April, as highlighted by the seasonally adjusted Markit/CIPS UK Construction Purchasing Managers’ Index® (PMI®) posting 49.4, from 47.2 in March. The index, which measures overall output in the sector, signalled only a marginal decline in April, with the rate of contraction the slowest in the current six-month period of falling activity.

And dragging the index lower was commercial activity and civil engineering:

Lower levels of construction output reflected declines in two of the three broad areas of activity monitored by the survey in April, with residential construction output the exception. Commercial activity dropped for the third month running, while work of civil engineering projects decreased markedly. The rise in housing activity was only marginal, but nonetheless the strongest since April 2012.

Whilst new business volumes fall for the eleventh month in a row:

Subdued underlying demand persisted in April, as highlighted by a fall in new business volumes for the eleventh consecutive month. The current period of declining new business is the longest since that recorded in 2008/09. That said, the latest drop in new work was only marginal and the slowest since last October. April’s decrease in new business was also much slower than the last December’s 44-month low.

Still contracting despite a ‘bump’ higher:

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But unlike in manufacturing, which saw jobs being shed, employment numbers in construction have remained stable – for now:

Employment numbers were broadly stable in the UK construction sector at the start of the second quarter. Anecdotal evidence from survey respondents suggested that subdued demand patterns had led to cautious job hiring trends, but a degree of optimism about the year-ahead outlook had helped stabilise overall staffing levels. More than twice as many survey respondents anticipate a rise in their output over the next twelve months as those that forecast a reduction. The degree of positive sentiment was only slightly weaker than March’s recent high.

Less input… less output… simple:

Meanwhile, input buying dropped again in April, reflecting reduced output and new business during the latest survey period. The decrease in purchasing activity was only marginal and the slowest since September 2012. Despite an eleventh consecutive monthly fall in input buying, supplier lead-times lengthened in April. Moreover, the latest deterioration in vendor performance was the most marked since February 2011, which survey respondents attributed to lower stocks and reduced capacity at suppliers.

All with price concerns easing – just in time for the new governor of the Bank of England to come in the summer and step on the money printing gas:

Average costs burdens increased in April, but the rate of inflation eased for the third time in the past four months. The latest rise in input costs was the slowest since June 2012 and well below the long-run survey average. A number of construction companies linked the moderation in cost pressures to lower commodity prices on world markets.

So another month goes by and another month of data comes in proving what an absolute failure the policies of the BoE and government have been. So in true topsy-turvy style, expect more of the same going forward.

Construction activity falls for sixth successive month in the UK

From the report:

• UK Manufacturing PMI at 49.8 in April, from 48.6 in March [nb: below 50 = contraction]

• Output and new orders rise for first time since January

• Solid inflow of new export orders

And digging into the report the ‘rut’ that the UK economy has now firmly been in for nearly 5 years so no signs of changing any time soon:

The UK manufacturing sector showed signs of stabilising at the start of the second quarter of 2013, as levels of production and new orders rose slightly after contracting in the prior two months.

At 49.8 in April, up further from February’s four- month low, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index® (PMI®) signalled little change in overall operating conditions in the sector, following contractions in the prior two months.

Apart from the mild gain in new contracts, the modest recovery in production volumes also reflected efforts to clear backlogs of work. Output growth was centred on the consumer and investment goods sectors, although the rate of contraction at intermediate goods producers also eased.

And just what has all that money printing got the UK? A steady decline in manufacturing:

(click for sharper image) 

The reason for the ‘bump’ in the numbers? New orders:

Manufacturers benefited from a modest improvement in new export order inflows, which companies attributed to increased sales to clients in North America, the Middle East, Latin America and Australia. The level of new export work received rose for the first time in over a year and at the fastest pace since July 2011.

And what the market giveth with one hand (increased sales to the above countries) it taketh right back with the other hand:

However, demand from the euro area remained lacklustre.

The incoming head of the BoE, Mark Carney (the Über-dove), will be happy to see that prices dipped in April. This will be more ammo for his money printing armament when he takes office this summer:

After rising for seven successive months, April saw a slight decline in average purchase prices. Companies reported paying lower commodity and fuel prices.

However, food, plastics and chemical prices rose:

However, a number of firms continued to report higher costs for chemicals, food products and plastics. The ongoing weakness of sterling also contributed to increased import prices.

And despite all the media cheer about this report, April was the third straight month that jobs were lost in manufacturing:

Manufacturing job losses were recorded for the third straight month in April. A solid reduction in headcounts at intermediate goods producers more than offset higher employment in the consumer and investment goods sectors. However, the overall rate of job loss was only marginal and weaker than in the prior two months.

All-in-all this looks more like a statistical blip which may carry over for the next month or so before the down-trend started in 2010 (the above chart) resumes with ernest. After-all why would the UK recover when NOTHING has changed in policy terms, the political action by both the government and the central bank continues to be what it was back in 2010, so why should we be looking for a different result?

UK manufacturing sector continues to contract as April sees third straight month of job losses for the sector

Stockman is an angry man and he admits so himself early in his 719-page tome. That anger adds bite and verve to his writing and keeps what is in fact a detailed historical account and economic analysis always highly entertaining. The book is long but never boring. Furthermore, Stockman does not let the anger cloud his judgement, which remains, in my view, relentlessly accurate throughout.

When dissecting Washington politics and Wall Street deal-making Stockman naturally draws on his experience as the director of the Office of Management and Budget under Ronald Reagan and his many years as an investment banker and private equity investor, and in so doing he reflects on much of his own professional life with commendable candor. But the book goes beyond these specific periods, and Stockman applies the analytical skills and insights acquired on these jobs to the critical examination of a wide spectrum of policy areas and historic periods. Stockman’s command of these topics and the masses of statistics and financial reports involved, and his powers of analytical dissection are impressive. But what is probably even more important for the success of his analysis is that it is based on an accurate understanding of essential economic relationships, in particular the importance of sound money. This is why the narrative that he develops captures America’s present challenges so truthfully and comprehensively. I very much shared Stockman’s anger when I started reading, but even more so when I had finished.

Public service

Stockman does a great service to his fellow Americans for he is providing a much-needed dose of realism that stands in stark contrast to the contrived optimism emanating from much of the political ‘debate’, from stock-pushing Wall Street experts on financial TV, and from the various Keynesian snake-oil merchants from both parties, all of whom want the public to believe that America is fundamentally healthy and just another round of ‘quantitative easing’, another deficit-funded tax break, or another ‘stimulus’ spending measure away from a bright future of self-sustained recovery. Instead, Stockman says it like it is. The US economy in 2013 is fundamentally weakened and structurally deformed by decades of artificially cheap money and a pathological debt addiction. Not the occasional artificial booms of the past twenty years, driven by Fed-induced bubbles in stocks, high-yield bonds and housing, give a correct picture of America’s long-term economic potential but the intermittent periods of slack when the fire-works on Wall Street inevitably end (and end in tears), and the persistent Main Street reality of declining employment prospects, stagnant real income and impaired competitiveness can no longer be covered up.

The Fed’s policy of cheap and then ever-cheaper credit has not only destroyed the free market by constantly distorting price signals, encouraging reckless debt accumulation and rewarding financial speculation (and consequently widening income and wealth gaps, as Stockman illustrates aplenty), it has thoroughly corrupted the political process as well. Stockman portrays a political system that, courtesy of the Fed’s cheap credit policies and interest rate repression, is now chronically incapable of living within its means, and is thus easy prey for hordes of crony capitalists – from the healthcare industry and the military-industrial complex to the ‘labor aristocracy’ of the united autoworkers union to the ‘too-big-to-fail’ banks, private-equity shops and hedge funds that play the system for a quick profit.

Crucially, Stockman puts his unsentimental assessment of America’s present reality into a broader historical context. Stockman identifies correctly the act of original sin that led America astray from the path of broadly free market economics and limited and fiscally responsible government, namely the abandonment of sound money. As America moved away from hard money, epitomized originally by the gold standard and a Federal Reserve with a strictly limited role as a bankers’ bank, and later, in already watered-down form, by the Bretton Woods gold-exchange-standard, and embraced an unconstrained fiat money system and ‘free-floating’ global paper monies it robbed the free market of its essential inner compass and ‘true north’ of market-based interest rates and market-enforced financial prudence.

The Fed, the central-banking branch of the federal government, was unleashed from its golden shackles in two historic steps in 1933 (by a Democrat president) and in 1971 (by a Republican president) but it was only over the past twenty years under the leaderships of Greenspan and Bernanke that the full destructive potential of unconstrained central banking has come to be felt. As Stockman shows with great clarity, both central bankers turned the Fed into a machine for macro-economic fine-tuning and prosperity management. Greenspan promised to watch the speculating classes’ backs by allowing them to blow bubbles and then shield them from the consequences. Bernanke took the mission one step further as he began (and still continues) to use his vast powers of fixing interest rates and printing limitless amounts of new money to steer the markets to the ‘correct’ yields on government bonds, the ‘correct’ spreads on mortgage-backed-securities, and the ‘appropriate’ shape of the yield curve, and by so doing to centrally manage the overall economy. Needless to say, such socialism for speculators, courtesy of the printing press, is happily explained by Wall Street economists as being in the public interest.

It is this deformation of money that is the root cause of the numerous deformations in the broader economy and the deformations in the political system. I am grateful that Stockman has fulfilled the important task of documenting in detail the many ways in which unsound money undermines the market economy and corrupts society.

Myth buster

Stockman is a myth buster par excellence. He busts myths that are cherished by Democrats and myths that are cherished by Republicans, and some cherished by both. Never pulling any punches and always happy to name names, he exposes as complicit in the deformation of American capitalism politicians, central bankers, and self-important economists of the Keynesian, monetarist and supply-side persuasion. He also identifies the many crony-capitalists, who shamelessly exploit the system’s many deformations for their own gain. But Stockman not only identifies the villains – the advocates and profiteers of unsound money – he also gives us the heroes, the defenders of sound money, people like Dwight Eisenhower, William McChesney Martin, and Paul Volcker, even if their efforts did ultimately not avert the corruption of American capitalism.

Here are the main myths that Stockman exposes:

Myth one: The 2008 financial crisis was the result of unregulated markets. TARP and the Fed saved the country from Great Depression 2.0

Nonsense, says Stockman. The financial crisis was the consequence of the Fed’s serial bubble blowing, and it should have been allowed to burn itself out in the corridors of Wall Street. Instead, Paulson and Bernanke panicked, declared economic martial law, namely that all rules of fiscal prudence and free market capitalism be tossed aside, and demanded that, via the bail-out of ‘insurance’ giant AIG, firms like Goldman Sachs, Morgan Stanley and others be saved from choking on their own outsized speculations.

Myth two: There was such a thing as the ‘Reagan Revolution’ and it revitalized American capitalism.

This is obviously a favourite whenever Republicans sit around the campfire. The reality looks different. Despite all the charisma and the eloquent free market rhetoric, the true legacy of the Reagan presidency is a Republican party that is now largely desensitized to fiscal profligacy and reconciled with endless deficits (Cheney’s famous dictum that “deficits don’t matter.”), as the party has happily joined the Democrats in the ‘aggregate demand’ management business. No longer to be outdone by ‘pro-active’ Democrats advocating Keynesian ‘spending’ to ‘stimulate’ growth, the Republicans came to embrace their own version of top-down GDP management: the Art-Laffer-inspired slashing of taxes at all cost. Fiscal prudence – and a true “hands-off” approach to the economy – was finally expunged from Republican DNA.

Myth three: The Great Depression was caused by the gold standard and was ended by Roosevelt’s Keynesian policies.

Ridiculous. The correction of the early 1930s was the combination of delayed effects of the First World War (a US agricultural boom that had led to overinvestment and distorted prices and had already ended in a bust in the 1920s) and the bursting of various bubbles blown during the Jazz-Age-version of bubble finance, such as the foreign bond market that provided funding for the purchase of then-sizable US exports, and the hot-money driven domestic equity boom. These distortions did not come about because of the gold standard but despite of the gold standard, which had been severely weakened as a disciplinary force not least due to the growing role of the Fed since 1914, and in particular since the central bank funded the war effort through money-printing in 1917-1918. By 1929 liquidation and correction were unavoidable. But what should have been a quick and decisive cleansing was turned into a drawn-out economic catastrophe by bad policy. First, there was economic nationalism – tariffs and other forms of protectionism – and then Roosevelt’s disastrous interventionism and relentless tinkering with the economy. As Stockman illustrates, Roosevelt did not enact a Keynesian textbook program at all. In fact, the clueless president had no coherent program whatsoever but instead implemented the type of potpourri of populist anti-market measures so fashionable at the time among Europe’s fascist leaders: odd infrastructure programs, price and wage fixing, state-directed resource use.

“Having triggered the demise of the old international order, the Roosevelt program of necessity was a purely domestic grab bag of experiments, gimmicks, and nonstarters. These ad-hoc Washington interventions – the Tennessee Valley Authority (TVA), National Recovery Act (NRA), Agricultural Adjustment Act (AAA) – did little to revive the dormant machinery of market capitalism and economic wealth creation and, instead, mainly shuffled income and resources randomly among regions, industries, and even individual business firms.” (Stockman, page 159)

Intermezzo

The New Deal had meant curtains for the ‘Old Republic’ and any commitment to sound money and sound public finances. However, and luckily for America, the newly expanded tool kit for interventionist politicians and central bankers remained largely unused for two decades after the end of World War II. A happy interregnum of monetary and fiscal discipline commenced, largely due to the good fortune of having people with strong traditional beliefs in positions of power, such as Dwight D. Eisenhower in the White House and William McChesney Martin at the Fed, two of Stockman’s heroes. Eisenhower slashed military spending after the Korean War and established the ‘Eisenhower minimum’ of strictly contained military outlays. Eisenhower was a soldier who hated war. A highly decorated general himself he famously warned his fellow Americans of the growing powers of the military-industrial complex and stared down a few generals himself when letting them resign in protest of his spending cuts. (By comparison, today’s Commander-in-Chief, former community organizer Barack Obama, oversees a military budget that is twice the size of even Bill Clinton’s.)

Over at the Fed, Martin not only coined the phrase “taking the punch bowl away when the party gets started”, he actually meant it and implemented it. Martin was deeply committed to the monetary discipline of the Bretton Woods system.

Needless to say, such discipline did not last long. America’s military adventures in Far East Asia and LBJ’s great society project put new demands on state spending and, by extension, on the printing press. The last link to gold – and the last remaining constraint on paper dollar creation- was severed in August 1971.

Myth four: Free floating paper monies are a sign of free market capitalism

The importance of what happened at Camp David in August 1971 can hardly be overestimated, and Stockman conveys the magnitude of these events vividly:

“Nixon’s estimable free market advisors who gathered at the Camp David weekend were to an astonishing degree clueless as to the consequences of their recommendation to close the gold window and float the dollar. In their wildest imaginations they did not foresee that this would unhinge the monetary and financial nervous system of capitalism. They had no premonition at all that it would pave the way for a forty-year storm of financialization and a debt-besotted symbiosis between central bankers possessed by delusions of grandeur and private gamblers intoxicated with visions of delirious wealth.” (Stockman, page 281)

Stockman is particularly scathing of Milton Friedman’s influence on these events.

“The great irony, then, is that the nation’s most famous modern conservative economist became the father of Big Government, chronic deficits, and national fiscal bankruptcy. It was Friedman who first urged the removal of the Bretton Woods gold standard restraints on central bank money printing, and then added insult to injury by giving conservative sanction to perpetual open market purchases of government debt by the Fed. Friedman’s monetarism thereby institutionalized a regime which allowed politicians to chronically spend without taxing.” (Stockman, page 272)

Famous academic economists who willingly throw themselves into the machinery of policy-making or policy-advice are among the most tragic-comic figures in Stockman’s narrative.

Thus we meet, on the political Left, John Maynard Keynes’s vicar on earth, the pompous Larry Summers pulling really big numbers out of the air, such as $800 billion, and demanding that this be spent instantly by Washington to stimulate the economy. There is, of course, Paul Krugman, who has never met a deficit-spending program that he thought was big enough. On the political Right, there is Art Laffer, who taught the Republicans not to worry about deficits if they result from tax-cutting as tax cuts are always stimulative and thus inherently self-financing. There is Milton Friedman who could explain the evils of rent-control better than anybody else but got free market money horribly wrong and provided intellectual cover for Tricky Dick’s dollar debasement. And then, naturally, there is Ben Bernanke, the veritable Dr. Strangelove of central banking, who believes this is 1930 all over again and who uses the present crisis to re-enact the policy program he believes, based on his own subjective and highly flawed interpretation of the Great Depression, the Fed should have enacted back then. One can only hope that this litany of abject failure serves as a warning to those economists waiting in the wings for their moment in the limelight, such as John Taylor who believes his eponymous rule is the answer to all central banking problems, or those economists who currently embrace the new Keynesian fad of ‘nominal GDP targeting’ (God help us!).

The deserving heroes of Stockman’s account are instead those statesmen and bankers who stuck by the old (and indeed ancient) rules of hard money and ‘balancing the books’.

Myth five: Modern financial markets represent free market capitalism.

Of course, in a proper free market, speculation, trading and the use of leverage would not only be permissible but would have an important role to play in the process of allocating savings and channeling scarce capital to productive uses. These activities would, however, be tightly controlled and strictly limited by the free market’s most effective regulators: profit and loss. Those regulators are now largely weakened or even removed entirely by the present system of costless fiat money, unlimited central bank backstops (Greenspan/Bernanke put) and artificially low interest rates. Without proper capitalist money, hard and apolitical, at the core of the monetary system, a free market in the rest of finance is impossible. Stockman does an excellent job illustrating the extent to which manipulated money and artificially cheap credit are corrupting the entire financial infrastructure by encouraging excessive risk-taking and the misuse of capital with severely adverse long-term consequences.

“…capital markets eventually lose their capacity to honestly price securities under a regime of unsound money; they end up dancing to the tune of the central bank; that is, pricing the trading value of financial assets based on expected central bank interventions, not the intrinsic value of their cash flows, rights, and risks.” (Stockman, page 383)

Stockman analyses a range of leveraged buy-out deals (LBOs) to show how, in our deformed financial system, these can often lead to huge pay-outs for highly leveraged investors while at the same time leaving the firms financially weakened and sometimes even bankrupt. This chapter may appear long and technically challenging for some readers but it is important as it gives the lie to frequent claims by those who operate in this arena that these activities are simply the free market at work, and that they lead to more efficient allocation of corporate control, to investment in productive capital and to jobs. Stockman exposes the full irony of the Republican Party putting forward Mitt Romney as their 2012 presidential candidate and trying to sell him as an experienced business man and ‘job creator’ when, as the former head of private-equity firm Bain Capital, he would be much more suitable as a poster boy for the lucky few who disproportionally benefitted from three decades of bubble finance and all the deformations it created, a system that stands in sharp contrast to the traditional capitalism the Republicans claim to advocate.

Stockman does certainly not make many friends on the political Left with his – brilliant and entirely justified – annihilation of the Roosevelt myth and the childish ‘Keynes 101’–programs of ‘spending ourselves to prosperity’, but his account supports to a considerable degree the allegation that the ‘1 percent’ live high on the hog at the expense of the rest of the population. However, as Stockman demonstrates at length, this is not the result of free market capitalism, and the answer to it is not regulation and confiscatory taxation. The root cause is unsound money and the possibilities that unsound money provides for the flourishing of ‘crony capitalism’.

Stockman’s outlook is not a happy one. As the nation runs out of balance sheets to leverage up and as, inevitably, ‘austerity’ sets in, he foresees ongoing political strife, further financial market manipulations, on-and-off print-operations by the Fed, and new financial crises. He closes the book with a few pages of policy recommendations, all of them sensible, I guess, and naturally following from the preceding extensive analysis. But Stockman is under no illusion that his policy ideas do not stand a snowball’s chance in hell to be implemented. In any case, the book is not really, first and foremost, about a new policy program but about shifting the parameters of the debate by providing a thorough and accurate description of America’s economic and political problems. And here the book succeeds with flying colors.

This is an important book. I wish it a wide readership.

Detlev schlichter is the author of Paper Money Collapse  where this article first appears. The book by the same name is out now and can be purchased here.

Book review: David A. Stockman – “The Great Deformation – The Corruption of Capitalism in America”

The Decline and Fall of Capitalist Money

The 20th century was, broadly speaking, a period of almost constant monetary decay. At around 1900 most economists, politicians and bankers would have correctly stated that global capitalism – an international market economy facilitating the free exchange of goods and services across political borders and thus allowing extensive human cooperation through trade – required an international, apolitical, and hard form of money. Such money was gold. It was the basis of the capitalist economy and it imposed strict discipline on all market participants. Crucially, that included governments and banks. Governments had to operate pretty much like private businesses. They had to balance their books, i.e. live within the means provided by taxation, and if they borrowed money in the marketplace their lenders were at full risk of default as no government could print money (gold) to repay loans or even meet interest payments on loans. Banks, of course, issued banknotes or bank-deposits that were not backed by gold but still used by the public as if they were money proper – these were and still are ‘money-derivatives’ – but again they did so at full risk of default as nobody could ‘print’ bank-reserves (gold again) to bail out the banks in case the public tired of the ‘derivatives’ and wanted to hold gold instead.

Over the course of the 20th century – or to be precise, from 1914 to 1971 – the monetary system was completely changed as a consequence of a number of entirely political maneuvers, all of them undermining the quality of money. Today, hard, international and apolitical money has everywhere been replaced with entirely elastic, national and politicized money, with money that central banks issue under a territorial monopoly at no cost and with no meaningful constraints on issuance, and that the central bankers use to ‘manage’ the ‘national’ economy (itself increasingly an out-of-date-concept), and to fund the state and grow the domestic banks (which, under the protection of a lender-of-last-and-first-resort, now issue unprecedented amounts of money derivatives).

Today the global monetary map resembles a patchwork of local, “nationalistic” paper monies, each of which is a political tool, often openly manipulated in an attempt to benefit the local export industry at the expense of foreign competitors or to ‘stimulate’ the ethereal concept of ‘aggregate demand’. Not surprisingly, the global economy is drowning in debt (increasingly public sector debt), suffers from a bloated financial sector and international trade tensions, and stumbles from one crisis to another, each one worse than its predecessor.

Bizarrely – but not entirely surprisingly – politicians, bankers and modern ‘enlightened’ economists now tell us that this unhinged financial system is to our benefit, really, just trust us.

Truth be told, the present monetary system is a hindrance to free trade, properly functioning markets and human cooperation across borders, and it might already be on its last leg. Yet a powerful but entirely misguided, consensus seems to have taken hold of public opinion, namely that ‘elastic’ money could be beneficial if money’s supply was only managed astutely by some clever monetary central planners.

I wrote Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown to challenge that consensus, to show that ‘elasticity’ of supply is always a negative for money. Elastic money is not needed. It is entirely superfluous. Moreover, elastic money is always disruptive. A monetary system based on an inherently elastic and constantly expanding supply of money is unstable and ultimately unsustainable. The reason why gold made such good money for thousands of years is precisely its essentially inelastic supply.

The word ‘Bitcoin’ does not even appear in my book. The reason is simply that I had not heard of Bitcoin by the time I handed in my final manuscript in early 2011. But when I learnt about Bitcoin soon afterwards I was immediately fascinated. Like many others, I could conceive of ‘internet money’ or ‘virtual money’. As I had explained in the book, money does not have to exist in physical form and the fact that most money today is electronic money poses no problem for the monetary theoretician. The problem with this type of money is not that it is immaterial but that its supply is completely elastic, and I simply could not see how money that was not based on a nature-given and strictly limited commodity could have an entirely inelastic supply. It was Bitcoin’s inelasticity by design that I saw immediately as one of its greatest strengths and its true genius.

My work rehabilitates the gold standard. It shows that it was a mistake to abandon gold as the basis of our financial system and replace it with entirely elastic state fiat money. When (not if) the present fiat money system finally ends we could and should return to gold. The only alternative I now see, at least on a purely conceptual level, is Bitcoin, or something like Bitcoin: Hard, apolitical immaterial, virtual money.

Bitcoin is cryptographic gold

By now most readers will probably have heard of Bitcoin and have some notion of what it is. But in any case, let me give you a quick run-down. The economist Nikolay Gertchev, in a blog on the Mises Institute website, explains it quite well, although Gertchev, like many other members of the “Austro-Libertarian” movement, is somewhat reserved when it comes to embracing Bitcoin. I am surprised by the extent of scepticism in that community and believe that in general it is unfounded. But first the description:

“A bitcoin is a unit of a nonmaterial virtual currency, also called crypto-currency, by the same name. (Bitcoin is a medium of exchange that only exists in the virtual world. DS) They are stored in anonymous “electronic wallets,” described by a series of about 33 letters and numbers. Bitcoins can travel from a wallet to a wallet, by means of an online peer-to-peer network transaction. Any inter-wallet transfer is registered in the code of the bitcoin, so that the record of its entire transaction history clearly identifies its owner at any single moment, thereby preventing potential ownership conflicts. Bitcoins can be further divided into increments as small as one 100 millionth of a bitcoin. The current outstanding volume of bitcoins is above 10 million and is projected to reach 21 million in the year 2140.”

“This brings us to the truly fascinating production process of the bitcoins. They are “mined” based on a pre-defined mathematical algorithm, and come in a bundle, currently of 25 units, as a reward for carrying out a large number of computational operations that aim at discovering the solution to what could be described as a randomized mathematical puzzle. The role of the algorithm is to ensure a declining progression of the overall stock of bitcoins, by halving the reward every four years. Thus, somewhere in the beginning of 2017, the reward bundle will consist of 12.5 units only. Also, the more bitcoins are produced, the harder are the randomized mathematical puzzles to be solved.”

Bitcoin is immaterial money yet strictly limited in its supply. Once 21 million units are in existence, probably in 2140, that’s it. No more Bitcoin can be issued. In fact, the supply of Bitcoin is more inelastic than the supply of gold. Also, the available supply of Bitcoin at any moment in time is substantially more transparent than that of gold.

If Bitcoin ever became money in its own right (how it could do so, I will discuss below), then it would be international, hard and entirely inelastic money. Like gold it also does not decay, is homogenous and (almost) perfectly divisible. Bitcoin fulfils all the requirements of good money. In the long run, gold does not have to fear fiat money, which is always suboptimal as it always is national, politicized, manipulated, unstable and inflationary money. For one thousand years, state paper monies have come and gone. Gold (and silver) stayed. Gold just has to sit still and wait for this, the latest and most audacious and arrogant, experiment with global free-floating paper money to fail, and it will come back. But now it faces, potentially, its first meaningful challenger: inelastic crypto-currency, Bitcoin.

Money of no authority

There is no central authority that issues Bitcoin and can manipulate its supply for its own gain or for any alleged ‘greater good’ of society. Positively cringe-inducing, although sometimes unintentionally funny, are the embarrassing attempts by establishment spokespeople to discredit Bitcoin on account that, unlike all that astutely managed state fiat money, Bitcoin would not constantly be losing purchasing power. In fact, just as in the case of gold, Bitcoin’s purchasing power can reasonably be expected to constantly appreciate over time.

But, so we hear the assorted ‘enlightened’ economists of the Keynesian persuasion exclaim in horror, that would mean we would all suffer from dreadful deflation, from which only an elite of highly-qualified government-appointed central bank bureaucrats and a well-oiled printing press can save us. Apart from the fact that these self-appointed money masters have neither proper economic theory nor the experience of a thousand years of financial history on the side of their destructive agenda, they obviously do not even comprehend how far their system of manipulated funny money has already discredited itself.

Inelastic money can satisfy ANY demand

As I have explained in Paper Money Collapse no society (not even a healthily growing one) needs a constantly expanding supply of money. Money is a unique economic good. Because it is the medium of exchange, money is the only good that is demanded exclusively for its exchange value, not for any use-value its substance (if it has a substance at all) may also have.

Nobody who has demand for money has demand for a certain quantity of paper notes, or a certain weight of gold, or a certain number of digits on a computer hard-drive. Money-users have demand for the exchange value that these items contain in exchange for other goods and service, i.e. qua being accepted by others as money. Demand for money is always demand for readily exercisable purchasing power.

Once a good is widely accepted as a medium of exchange (whether that good is gold, paper tickets, or sequences of digital ones and noughts), the public can, at any moment in time, hold precisely the amount of money – readily exercisable purchasing power – it wants to hold. If the demand for money goes up, the public will sell non-money goods for money or reduce money-outlays for non-money goods. As a result, the money-prices of non-money goods fall and the purchasing power of each monetary unit (whether gold, paper tickets, or digital code) will rise. This process satisfies – automatically, instantly and naturally – the higher demand for money. The public now holds more readily exercisable purchasing power in the form of money, not because a clever, über-prescient money producer has created new money units, but simply and much more straightforwardly, because the exchange-value of the existing money stock has increased.

Once a good is widely accepted as money, no further production of that good is required. In fact, as I also demonstrated in Paper Money Collapse, any attempt to flexibly inject money into the economy in order to ‘stabilize’ money’s purchasing power, or, as is declared policy today, to constantly debase it at an officially sanctioned rate, must not only fail in its primary objective (‘price level stability’) but must cause grave distortions in the wider economy. Furthermore, the steady secular deflation that is to be expected under inelastic money, such as gold or Bitcoin, is not only not economically disruptive, it is even beneficial. Just consider one aspect: as money will then have a moderate positive real return, people who have no knowledge of financial markets and investing, and who do not have the resources to hire professional advisors, can save by simply holding money. This is impossible in our fiat money economy of constant inflation and increasing monetary instability.

Truly international

As Bitcoin has no issuing authority it has no country of residence or origin. It is truly global money. It can be used for payment anywhere in the world without going through banking systems or foreign-exchange markets. It is undeniable that the multitude of local paper monies poses a considerable hindrance to free trade and thus the rise of living standards in large parts of the world as this system necessarily introduces an element of partial barter into international trade relations. Today’s massive foreign-exchange markets are nothing but a make-shift, a crutch to deal with the suboptimal and politically motivated arrangement of various local currencies. This market ties up capital (both financial and human) without adding any real wealth to society.

If Bitcoin were to get widely accepted – and that is still a big if – it could become a great platform for connecting potentially any two counterparties in the world in direct financial transactions. It is the ultimate disintermediator: no banks needed.

At this point it might be objected that it only connects people who have access to the internet or smartphones but this is obviously a rapidly shrinking barrier. On my travels in Africa last year, I found that internet access was usually more ubiquitous than bank branches. And by the way, Kenya and Tanzania already have M-Pesa, the world’s most developed mobile payment system that uses the mobile phone network to facilitate money transfers. These countries could easily make the transition to smartphone-based payment systems without ever making the detour through clunky bank branch networks.

On the issue of tying down capital, Bitcoin wins hands-down against any other financial system, including a gold standard. Bitcoin does not require any physical storage, which naturally is always expensive. Bitcoin is monetary raw material and payment system in one. (Although, fascinatingly, the free market has already created physical Bitcoins.)

Money requires trust. We presently do not live under a gold standard but, as Jim Grant has observed so astutely, a PhD-standard, a system of flexible, state-sponsored money, managed by people like Ben Bernanke and his team at the Fed, who enjoy the privilege of implementing policies based on their own faulty monetary theories and hair-raising interpretations of economic history, while a cheap-money-addicted class of speculators plays them like a fiddle and laughs all the way to the bank. The appeal of gold has always been that it does not require the public to put trust in a ‘money elite’ but that it only has to trust gold’s creator: mother nature. With Bitcoin you only have to trust the algorithm, and as this is open software, there cannot even be a hidden agenda. Bitcoin, just like a proper gold standard, is hard, capitalist money with no politics, no Federal Open Market Committee meetings, no monetary policy, no central banking bureaucracy. It is free market money.

Common objections to Bitcoin

Given its free market and ultra-hard-currency credentials, the scepticism towards Bitcoin in parts of the Austro-Libertarian community is somewhat surprising. I think some of the objections are easily refuted. There is, first of all, the idea that Bitcoin could have many imitators, which would undermine its uniqueness and reduce its attractiveness. If Bitcoin itself cannot be inflated, what about the concept of crypto-currencies, could it be inflated by too many different currencies on offer?

This argument strikes me as weak. By all accounts Bitcoin’s design and cryptographic robustness are an exceptional accomplishment. It is not as if any hacker of medium talent could pull off something similar tomorrow. But even if he could, the argument completely underestimates first-mover advantage in the area of goods and services with substantial network effects. How many people have launched a second Facebook or a second Twitter since these inventions kicked-off the social media craze, although technologically, these inventions are much simpler than crypto-currency? – Nobody. The network effects of these goods are immense. Once they have a certain acceptance it is hard, if not impossible, for late-comers to break in. These goods and services have value for their users predominantly because others use them too, and the more people use them, the more valuable they get. There is no good for which this is truer than money – the general medium of exchange. Customized money is an oxymoron. Consequently, once a form of money is accepted, it is very difficult to take business away from it.

This feature of money is obviously a problem for Bitcoin in its fight against established state paper monies but is equally a big plus when it comes to keeping potential new entrants into the crypto-currency arena at bay. Bitcoin now dominates the market for crypto-currencies (it pretty much IS the market for crypto-currencies, in my view) and I believe that only the discovery of major flaws in Bitcoin – none seem to have surfaced in its four-year life up to now, and every day they are less likely to appear -, or if some vastly superior crypto-currency came along but I am hard-pressed to see in which aspect it could outperform Bitcoin. But just launching another crypto-currency – a Bitcoin clone – is certainly not going to put a dent into Bitcoin.

Menger and Mises would love Bitcoin

Many ‘Austrians’ get thrown off by Menger’s theory of the origin of money and Mises’ so-called ‘regression theorem’, and somewhat rashly conclude that Bitcoin can never achieve money-status because it did not originate from a non-money commodity. Mises was correct when he stated that something could only become money if it had previously, that is, before it was used by somebody as a medium of exchange in its own right for the first time, established some value in trade. For if that had not been the case, how could the first person to employ the commodity as money have any point of reference by which to assess its value and determined its exchange value for the first monetary transaction? However, this theorem, which remains unrefuted in my view, does not apply to Bitcoin. Bitcoin can simply piggyback on established forms of money that already have exchange-value and derive its original value from them before it does, over time, establish its own value.

The same has, in fact, happened in the case of paper money. The paper notes that are used as money today did not start their ascent to widely used and generally accepted monetary assets from humble beginnings as commodities – that is, as mere paper – but started out as paper-claims on physical gold. Gold was money and the paper tickets simply a technology to transfer ownership of gold. When the first banknote was used it did not derive its exchange value from its paper content but from the fact that it could be exchanged for a fixed amount of gold. That was the necessary reference point – in accordance with Mises’ regression theorem. Paper money started as payment technology and as the public got used to paying with paper rather than with gold coins and gold bars, the underlying gold content could be reduced over time and ultimately the link to gold completely severed. What gives value to these paper tickets today? – The fact that the public still accepts these paper tickets in exchange for goods and services. That is all. And in fact, it is all that is needed. Any form of money –even gold, which still retains some functionality as industrial commodity or consumption good (jewellery), although that functionality is now irrelevant for its role as monetary asset – any form of money derives its money-value from the trading public and the public’s willingness to exchange the monetary asset for goods and services.

And herein lies in fact Bitcoin’s biggest challenge. However, this challenge is not of a conceptual nature. The concept of Bitcoin as money is, as I have tried to show above, extremely compelling. But Bitcoin has to offer something to the average money-user that state paper money cannot offer. Just as the banknote bestowed an instant and discernible benefit to each money-user relative to heavy gold coins, that allowed it to become a widely used medium of exchange in its own right and ultimately even operate without any link to gold, so Bitcoin has to set itself apart from fiat money and overcome fiat money’s powerful network advantage. The fact that fiat money is suboptimal in terms of its inflation characteristics and its disruptive effects on the broader economy is not something that bothers the average money user at the moment he desires to engage in monetary transactions, and do so as conveniently, securely and easily as possible. The state paper money system today offers easily useable ‘computer money’ and the broader public is still happy to use it. Why switch to Bitcoin?

Will Bitcoin get accepted by the wider public?

It is my impression that the community of Bitcoin users, although apparently growing strongly, is still largely composed of those who are fascinated by the technology as such and who want to be part of something new, and those who like it for ‘ideological’ reasons, i.e. those who detest state paper money or dislike the banking system. Thus, there is apparently still a big contingent of computer ‘nerds’, hackers, crypto-anarchists, anti-government libertarians and Occupy-Wall-Street-types among its user base (which is not to say that there are not many who do not fall into any of these categories). How could Bitcoin attract a broader base of money-consumers beyond these groups?

One powerful aspect is cost. Bitcoin transactions are free, so Bitcoin could become – or maybe it is already – the Skype of payment systems. Another attraction could simply be the usually reasonable, and with some effort potentially considerable, anonymity and untraceability that Bitcoin offers. This seems to be a hotly debated topic. On the one hand, Bitcoin is incredibly transparent. All transactions are literally in the open domain. However, each ‘user’ is only identified by his ‘address’ and the number of addresses is practically unlimited. One could use a new address for each transaction. This may not mean instant untraceability from ‘the authorities’ but then again, certain techniques and add-ons, some of which are still being developed, have the potential to increase anonymity and untraceability even further. Additionally, it is possible to acquire Bitcoin for cash – rather than via the established and already regulated exchanges – and thus anonymously.

This means Bitcoin could be used, as is a frequent charge against it already, for illegal transactions involving drugs and guns. But people do not have to be drug or arms dealers, or even ordinary tax cheats, to appreciate a certain degree of financial privacy. As bank secrecy laws disappear everywhere and as almost all governments are waging a ‘war on cash’, by which any transaction that involves more than just petty cash is to be moved to electronic systems within the state’s fiat money network, so that ‘the authorities’ achieve full ‘transparency’ as to what the citizenry is up to at any moment, there could well be a widespread demand for ‘outside’ electronic payment systems offering privacy. For example, a range of ‘activities’ exist engaging in which may not be, or not yet be, illegal but considered a major potential embarrassment to the parties involved if made public (gambling, pornography, escort services), so that many people would not want to have payment for them on their permanent records. This potential development is not lacking in irony: Our modern information society with its trends towards the ‘transparent citizen’ and unlimited data storage holds many threats to a free society, privacy and individual liberty. It would be fitting if countermoves to these trends emanated from the same technology.

An additional boost to Bitcoin may come straight from the crumbling state paper money infrastructure itself. The cases of Iceland and in particular Cyprus have driven home the point that ‘money in the bank’ is far from safe, and even if your deposits have survived the bank collapse and the ‘bail-in’, you may not get them out of the country any time soon as capital controls are likely be imposed. As the overstretched paper money economy staggers towards its inevitable demise, more of these instances will occur providing an additional opening for Bitcoin. To the best of my knowledge, Bitcoins cannot be confiscated and Bitcoin accounts cannot be frozen Additionally, you store Bitcoin yourself rather than put them into a fractional-reserve bank that would conveniently use them as ‘reserves’ for its own ‘money derivative’ production.

What are Bitcoins worth?

I agree with Jon Matonis that nobody can give a reasonable answer but that the outcome is probably binary: Either Bitcoin ultimately fails and the individual Bitcoins end up worthless. Or Bitcoin takes off and Bitcoins are worth hundreds of thousands of paper dollars, paper yen, paper euros, or paper pounds. Maybe more. Those who buy Bitcoin as a speculative investment should consider it an option on the future success of the crypto-currency. At time of writing, Bitcoins are trading at $127 and £83 at Bitcoin-exchange Mt. Gox.

On a personal note, my biggest ‘liquid’ asset continues to be physical gold. As I explained on numerous occasions, I consider gold to be the essential self-defense asset in the ongoing paper money crisis. Gold is not being used presently by the wider public as a medium of exchange either but its two-thousand-plus year history as global money means that it retains monetary asset status and that its historic function as a liquid and lasting store of value – a function that fiat money cannot fulfil – remains unrivalled. By comparison, the brand-new crypto-currency Bitcoin has to first earn its stripes as a monetary asset by proving itself as a ‘common’ medium of exchange. That is why I view Bitcoin very differently from gold, although the attraction of both has its origin in the demise of entirely elastic, politicized state fiat money. I will certainly continue to follow the Bitcoin revolution with interest and sympathy.

In the meantime, the debasement of paper money continues.

Detlev schlichter is the author of Paper Money Collapse  where this article first appears. The book by the same name is out now and can be purchased here.

Could Bitcoin be the money of the future?

New manufacturing orders fell slightly in the three months to April but output increased and firms are expecting orders to grow in the next quarter. That’s according to the latest CBI quarterly Industrial Trends Survey.

So orders fell and yet manufacturers made more ‘stuff – doesn’t seem like a great business model to us.

And before everyone reaches for the usual scape-goat of all the ills that trouble the UK economy, namely Europe, it was domestic demand that was the cause of the drop-off:

The decrease in total new orders was driven by a fall in domestic demand this quarter, the fastest pace of decline since January 2012, whereas export orders stabilised.

Once again no matter how bad that data is in the here-and-now, businesses seem to be always hoping that next quarter things will be different:

However, manufacturers have increased their stocks of work in progress and finished goods. This was most likely in anticipation of a better coming quarter, with expectations for total orders growth at the strongest level for a year. Meanwhile output is also expected to rise and manufacturers’ optimism has improved.

We wonder how long the headcount at these companies can remain elevated if/when next quarter’s numbers also disappoint:

Employment in the sector increased in-line with expectations in the three months to April, and manufacturers expect to increase their headcount in the next quarter.

And despite actual sales disappointing it seems that unit costs have once again risen:

Contrary to expectations, domestic price inflation was unchanged on the quarter, but growth in average unit costs was the highest since January 2012, squeezing manufacturers’ profit margins again.

And here are the numbers:

Key findings – three months to April:

• 22% of firms reported an increase in total orders and 28% said they decreased, giving a balance of -6% – disappointing expectations of growth (+14%) in the previous survey, but nonetheless above the long-term average (-3%).

Domestic orders look shaky:

• The balance for domestic orders (-14%) was the lowest since January 2012 (-17%), while the balance for exports orders (-3%) was the highest since April 2012 (+4%).

And rather worryingly firms working below capacity reaches a more than two year high:

• The proportion of firms reporting that they were working below capacity (59%) was at its highest since January 2011 (59%).

• However, 23% of firms reported an increase in output and 18% said it decreased, giving a balance of +5%.

• Manufacturers said they were slightly more optimistic about their business situation than in the previous quarter (+5%).

• Numbers employed in the manufacturing sector increased (+10%).

And here comes the ‘hopium’:

Next quarter:

• A balance of +18% of manufacturers expect total orders to increase, with +19% expecting export orders to rise and +8% predicting growth in domestic orders.

• A balance of +23% of firms expect output to increase – the highest level since April 2012 (+24%).

• A balance of +8% of manufacturers expect to increase headcounts.

Just look at the rise in unit costs:

Prices, investment plans and constraints:

• Average domestic prices were broadly flat (+2%), while average export prices decreased (-7%). Average unit costs for manufacturers increased significantly (+27%) – the highest balance since January 2011 (+27%).

• Concern about prices acting as a constraint to export orders in the next three months fell (to 40%), the lowest since April 2012 (39%), with sterling depreciating by 4.2% between the January and April survey periods

• Concern about political and economic conditions abroad as a likely limit on exports was cited by 39% of firms, the highest since April 2012 (41%).

• Manufacturers expect to spend more over the next year on product and process innovation (+26%), training (+13%) and plant and machinery (+4%) but less on buildings (-22%) relative to the past twelve months – the latter is the lowest balance since July 2009 (-43%).

The below bombshell was left right to the end of the report. More manufacturers are citing labour shortages as a constraint to capital spending than at any time in the past 30 years.

• The number of manufacturers citing labour shortages as a constraint to capital spending in the year ahead rose to its highest level recorded in the survey (16%, record since October 1979); the availability of internal finance as a limiting factor rose to its highest level (30%) since April 2010 (30%); and inability to raise external finance as a limiting factor rose to its highest level (12%) since October 2009 (14%).

Once again just another piece of data that shows that the poor state of the UK economy shows absolute no sign of letting up. And once again it will add another quiver in the money-printing bow of the BoE, which they will no doubt begin to start shooting the second Mark Carney’s feet touch the floor of the offices of the BoE in Threadneedle Street.

CBI manufacturing data comes in much worse than expected as labour shortage constraints reaches a 30 year high

Today we got the borrowing figures for March in the UK, which means we can now see what the UK borrowed for the financial year 2012/13. And rather than cut the deficit Osborne has managed to run a deficit pretty much exactly the same as 2011/12.

From the report:

Public sector current budget deficit was £10.6 billion in March 2013; this is a £0.9 billion higher deficit than in March 2012, when there was a deficit of £9.7 billion.

Public sector net borrowing (PSNB ex) was £15.1 billion in March 2013; this is £1.6 billion lower net borrowing than in March 2012, when net borrowing was £16.7 billion.

For 2012/13, public sector net borrowing (PSNB ex) was £86.2 billion; this is £34.7 billion lower net borrowing than in 2011/12, when net borrowing was £120.9 billion.

For 2012/13, central government net cash requirement was £109.5 billion; this is £17 billion lower net cash requirement than in 2011/12, when net borrowing was £126.5 billion.

Which all looks like the deficit was reduced right? Well, as ever those above figures don’t account for the one-off transfer payment from the nationalisation of the Royal Mail pension and also doesn’t account for the rather banana republic situation where the BoE remits interest payments made by the government to the BoE back to the government. So what happens when you back these numbers out and look at the ‘real’ deficit of the UK?

In 2012/13, public sector net borrowing and public sector current budget deficit are reduced by £6.4 billion as a result of cash transfers from the Bank of England Asset Purchase Facility Fund to Government.

In 2012/13, public sector net borrowing and public sector net investment are reduced by £28.0 billion as a result of the transfer of the Royal Mail Pension Plan in April 2012.

After removing the effects of the transfer of the Royal Mail Pension Plan and the transfers from the Bank of England Asset Purchase Facility the first 2012/13 estimate of public sector net borrowing is similar in level to last year’s borrowing at £120.6 billion, £0.3 billion lower net borrowing than in 2011/12.

So there you go folks, the ‘real’ deficit number for the UK was £120.6bn in 2012/13, in 2011/12 it was £120.9bn. So simply put the deficit was exactly the same as the previous year – all that talk about ‘cutting the deficit’ has been just that, talk.

And what about the debt? Remember that when the Tories took office the debt of the UK was standing at around £770bn.

Public sector net debt was £1,185.8 billion at the end of March 2013, equivalent to 75.4% of gross domestic product (GDP).

That’s an increase in the debt of some 53% in just four years. So under the Tories, you know, those austere Tories, the debt has actually exploded. Is it any wonder we’ve dubbed this Chancellor the ‘faux’stere Chancellor.

The report goes on to remind readers that there were other ‘one-off’ payments that flattered the figures in 2012/13 that won’t be around in 2013/14:

However, in April 2012 the historic liabilities and some of the assets of the Royal Mail Pension Plan were transferred to Government which led to a reduction in public sector net investment and PSNB ex of £28 billion. If this one-off effect is removed then PSNB ex for 2012/13 is actually £6.7 billion lower than in 2011/12.

In addition, in January, February and March 2013 cash was transferred from the Bank of England Asset Purchase Facility (APF) to the Government which led to a reduction in public sector current budget and PSNB ex of £6.4 billion. If this effect is removed in addition to the effect of the Royal Mail Pension Plan transfer then PSNB ex for 2012/13 is at a similar in level to 2011/12 at 0.3 billion lower.

There are other events included in the 2012/13 PSNB ex which are unique to this year. These include the £2.3 billion transfer to Government of the final profits of the Special Liquidity Scheme (SLS) and the £2.3 billion receipt from the 4G spectrum auction.

Just remember that these one-off payments aren’t going to be around in 2013/14, apart from the BoE payments. But the trouble with the BoE payments is that in a few years time when interest rates increase, rather than receiving cash from the BoE the government will actually have to start sending money to the BoE to keep the BoE solvent.

And remember those small banks that went under in 2008,  Northern Rock and Bradford and Bingley, the ones that the UK bailed-out? Well, what was the total cost of those bailouts?

In January’s PSF bulletin the classification decision bringing Northern Rock Asset Management (NRAM) and Bradford & Bingley (B&B) into central government was implemented.

The headline impacts of the reclassification were to:

- increase central government net debt, and so PSND ex, by £71 billion at the end of 2012.

Yep, you read that correctly, the cost to the UK taxpayer was an eye watering £71bn, just imagine the cost of one of the UK’s bigger banks went under.

Debt in the UK now stands at 75% of GDP or £1185.8:

(click for sharper image)

But of course that isn’t the ‘real’ level of debt in the UK – when you include all that bailout money for bailing-out the banks the number is higher, a lot higher in fact:

(click for sharper image)

That’s 140% of GDP for those counting.

After yet another year of massive deficits, increased government spending and exploding debts, we hope it can’t be long until the austerity myth in the UK is consigned to the dustbin of history, a place where it should’ve been put from the very outset.

The UK deficit is NOT being reduced as the Tories add more than 50% to the national debt in 4 years

Here’s the latest minutes from their meeting from the 3-4 April 2013:

For much of the month, financial market attention had been focused on the progress of negotiations to resolve the banking sector crisis in Cyprus, and their implications for the rest of the euro area. The agreed outcome had included a €10 billion loan by the European Stability Mechanism and IMF to the Cypriot authorities, the temporary imposition of capital controls, and the resolution of the two largest Cypriot banks, with losses borne by their bondholders and uninsured depositors. An initial proposal to impose losses on insured depositors by way of a levy on all bank deposits had been rejected by the Cypriot parliament.

Of course we new ahead of time what was about to happen in Cyprus and were more than willing to turn a bling-eye to all the massive deposit withdrawals from some very wealthily individuals and businesses from the UK based Cypriot banks to help them avoid the ‘levy’ (**cough** theft **cough**).

The market reaction to these developments had been relatively limited, with only small moves in most market prices, perhaps reflecting a perception that the situation in Cyprus was contained or unique. Nevertheless, some market moves could be interpreted as suggesting that the Cyprus bailout had demonstrated a greater commitment by the euro-area authorities to shift the burden of future banking sector restructurings from governments to private creditors. Consistent with that, government bond yields had fallen in Italy and Spain, as well as in Germany. And bank CDS premia had risen, especially for banks operating in the euro-area periphery countries; bank equity prices had generally fallen.

And by limited we of course mean limited to those trying to cross the Italian Swiss boarder with bars of gold.

The Financial Policy Committee (FPC) had announced that major UK banks and building societies should achieve a risk-weighted capital ratio, on a full Basel III basis with adjustments for expected losses, of 7% by the end of 2013, with the Prudential Regulation Authority to examine the needs of individual banks. Against that benchmark, UK banks and building societies had a collective capital shortfall at the end of 2012 of around £25 billion. This shortfall was at the lower end of external commentators’ estimates and there had been little impact on market prices. Equity markets more generally had continued to be buoyant, with some major international equity indices trading around all-time highs in nominal terms.

And of course they were lower than market participants’ expectations because when all is said and done they will need nearer £50bn – but pretending they only need £25bn has managed to keep the show on the road for now.

There had been little change in short-term monetary conditions in the United Kingdom, and policy was expected to remain highly stimulatory for some years. A majority of economists polled by Reuters had expected further asset purchases at some stage. And the first increase in Bank Rate was not fully priced into OIS rates before 2016, broadly in line with the implied timing of the first policy rate increase in the euro area and a little after that in the United States. The sterling effective exchange rate had risen by 1% on the month. It had earlier fallen to its lowest level since July 2011, but had then firmed following events in Cyprus, the publication of the minutes of the March MPC meeting, and comments by the Governor.

Because we’re going to print-baby-print.

Longer-term nominal yields had declined further in the United Kingdom, with the ten-year government bond yield falling by around 20 basis points to 1.9%. There had been little reaction to the news that Fitch had placed UK government debt on negative watch. The fall in nominal yields was associated with greater falls in real yields; breakeven inflation rates had drifted up in recent months. Three-year inflation rates implied by swaps had risen by more than in the euro area or the United States, consistent with expectations of UK inflation returning to target more slowly. And the market implied measure of inflation in five years’ time had risen by a further 30 basis points since the sharp correction in mid-January when the National Statistician had announced that the RPI formula would not be changed.

Let’s all pretend that bond rates mean anything anymore, after we’ve essentially ‘become the market’ through QE, any pricing signal they give is next to useless.

Ahead of the MPC’s policy decision, the Bank of Japan had announced on 4 April a set of highly stimulatory measures aimed at meeting its 2% inflation target at the earliest possible time. These included the intention to double the monetary base by the end of 2014 and increase purchases of Japanese government securities across the maturity spectrum. The immediate market reaction to these announcements had been strong, with the yen depreciating by 3% and ten-year Japanese government bond yields falling sharply.

What could possibly go wrong with the doubling the monetary base in under two years?

There had been further evidence of a gradual recovery in global growth, with early signs that both world trade and investment had picked up a little in the first quarter. But the pattern of that growth remained uneven, with a lack of momentum in the euro area contrasting with a stronger outlook for the United States and much of Asia.

And by uneven we mean there is no growth in the West, only inflation and goosed GDP numbers as a result.

In the euro area, the earlier tentative signs of an improvement in business and household surveys had not been maintained. The area-wide services and manufacturing Purchasing Managers’ Indices (PMIs) had both fallen in March and remained at levels consistent with further contraction in activity. At the country level, the composite PMIs fell in both Germany and France, suggesting little positive momentum even in the core economies. It was possible that elevated event risk, associated with continued political uncertainty in Italy and the handling of the Cyprus bailout, would weigh further on confidence in the euro area.

Forget what we said about the impact of Cyprus above being ‘relatively limited’, we need to keep that excuse in our back pocket for when a Europe wide recession kicks in later in the year.

The latest data for the United States had been more positive and suggested a return to moderate economic expansion following a near standstill in the fourth quarter of 2012. Consumer spending had appeared robust, the housing market had strengthened further, and employment had risen strongly in February, with non-farm payrolls increasing by 236,000. Both the manufacturing and non-manufacturing PMIs had fallen in March, unwinding the improvement seen earlier in the year, but continued to point to positive growth. Fiscal policy had become more restrictive. Government funding levels had been agreed for the remainder of the fiscal year, thereby averting a federal government shutdown, but the $85 billion of sequestration cuts to the annual budget had been left in place.

Let’s just not mention that food stamp usage in the US just hit another record – hardly the stuff of ‘economy recovery’.

There had been further evidence of expansion in Asia. The PMIs had risen in China in March. And business confidence had improved in Japan amid expected and realised announcements of monetary and fiscal policy stimulus from the Japanese authorities.

Best not mention Chinese debt though.

Commodity prices had fallen a little during the month. There had been a sharp fall in corn prices following a revision to estimates of US stock levels. In dollar terms, the price of oil had fallen by around 4%. UK wholesale gas prices had been very volatile, reflecting supply constraints and a lack of available storage, and had ended the month 7% higher.

So any benefits of lower commodity prices have been effectively wiped out because of that 7% rise in gas.

There had been relatively little news in the latest ONS estimates of income and expenditure in the fourth quarter of 2012. GDP had fallen by 0.3%, unrevised from previous estimates, with the decline more than accounted for by the unwinding of the temporary boost from the Olympic Games in the third quarter. GDP was 0.2% higher than it had been a year earlier. Within that, net trade had subtracted 1.2 percentage points from GDP growth. But final domestic demand growth had been more robust at 1.7%. Household consumption had grown more strongly over the year than previously estimated and, with the re-emergence of a real income squeeze, the saving ratio fell back to 6.7% in the fourth quarter. Business investment growth had slowed in the second half of 2012, despite robust investment in the extraction and utility sectors.

You see, it’s all the Olympics fault – the economy would actually roaring along if it wasn’t for those pesky olympics.

Official indicators of activity in the first quarter of 2013 had been mixed, with a fall in manufacturing output in January offset by a 0.3% rise in the output of the service sector. Oil and gas extraction had fallen by 4.3% in January as output continued to be adversely affected by repair and maintenance. Survey indicators, while somewhat diverse, had been mildly encouraging. The Markit/CIPS services activity PMI for March was higher than in the autumn and winter, although the manufacturing output PMI remained weak.

And by mixed we really mean dreadful – dreadful enough for the IMF to come out and downgrade GDP forecasts again for this year.

There had been further evidence of an improvement in the supply of credit following the fall in lenders’ own wholesale and retail funding costs since the middle of 2012. Some, but not all, of this reduction in funding costs had been passed through to loan rates. Mortgage rates had fallen sharply over this period, although the pace of decline had eased in March. Effective new business rates on loans to companies had fallen by about 25 basis points since June. Some lenders had also used cashback deals or reductions in fees to pass through the benefits of reduced funding costs to their smaller corporate customers. The Bank’s inaugural Bank Liabilities Survey had suggested that lenders expected to reduce further their transfer prices – the cost charged to business units to fund the flow of new loans – in the following three months. And the Bank’s Credit Conditions Survey had indicated that lenders were expecting to reduce spreads further on secured loans to households and loans to businesses.

We give free money to the banks and now the charge more for lending. We’re sure this will go down well with the public… oh wait.

Surveys of businesses taken in the first quarter had also suggested that there had been some easing in credit conditions, although significant differences continued to be reported in access to finance between large companies, especially those with access to the capital markets, and small companies. There was evidence that investment by companies with access to capital markets, accounting for roughly half of UK business investment, had risen strongly. Given the aggregate behaviour of UK business investment, this would imply that investment by those without access to capital markets might have fallen on average.

Looking out for giant corporations since 1694 – maybe that should be our new motto.

Despite significant improvements in the price and availability of credit, there had been little sign so far of any significant pickup in net lending to businesses. That may have reflected the usual transmission lags, but it could also point to a more fundamental change in the structure of credit markets. Some contacts of the Bank’s Agents had reported a continuing lack of trust between banks and small businesses, and fears that applications for new lending facilities might result in the terms of existing facilities being reappraised. Nevertheless, lenders surveyed in the Bank’s Credit Conditions Survey had reported expectations of a pickup in the demand for bank credit in the next three months. And a special survey by the Bank’s Agents had found that businesses that reported that credit conditions had loosened over the past year were expecting to increase their demand for credit over the next twelve months. In contrast, businesses reporting tighter credit conditions were expecting to reduce their demand. More generally, business surveys had pointed to a slight pickup in investment intentions, consistent with a possible building in the demand for finance.

Let’s not for one second think this might be a ‘demand for credit’ issue.

There were some signs that the improvement in the supply of credit had been passing through to the housing market. Housing transactions had risen by over 5% in February, consistent with the growth of loan approvals seen at the end of 2012. The three-month annualised growth rate in net secured lending to individuals had picked up to 0.7% in February. But loan approvals for house purchase had fallen in January and February, possibly affected by the cold weather. Additional measures to support housing market activity had been announced in the Budget, although details of the mortgage guarantee component of the Help to Buy scheme had not yet been finalised. Compared with the previous three months, house prices had risen by about 1% in the three months to March on the average of the main lenders’ indices.

Once again we’ve managed to blame all the UK’s economic woes on the fact that it get’s gold in winer.

The three-month annualised growth rate in unsecured lending had picked up to 5.5% in February, with positive net lending in both credit cards and other loans and advances. Retail sales had grown by 2% in February, consistent with further growth in consumption in the first quarter of 2013.

Because people that are up to their eye-balls in debt maxing out their credit cards just so they can get by is a good thing right?

Twelve-month CPI inflation had risen by 0.1 percentage points to 2.8% in February, in line with market expectations. Although changes to duties announced in the Budget and lower sterling oil prices would dampen the expected increase over the coming months, inflation still appeared likely to pick up to around 3% in the middle of the year. And the recent cold weather had increased the risk that further rises in seasonal food prices would push up CPI inflation in the months ahead.

High prices are ALL the fault of the ‘cold weather’ in winter – it has NOTHING to do with our unprecedented money printing ways.

Oh, and let’s not mention that we haven’t hit out legal target for nearly 3 and half years.

Pay growth had continued to be weak: annual growth in private sector regular pay in the three months to January was 1.2%, a fall of around 1 percentage point since the middle of 2012. Indeed, the level of average weekly earnings in January, at £470, was lower than it had been the previous April. The continued weakness of pay pressure was likely to reflect both resilient labour market participation rates and sluggish productivity growth.

And when you account for a 2.8% CPI inflation rate people actually had their pay reduced.

Employment had increased in the three months to January by 131,000, continuing the upward trend seen since the middle of 2011. Unemployment was broadly unchanged at 2.52 million, down 136,000 from a year earlier. Labour market participation had appeared more resilient than previously expected. In contrast to previous recessions, where flows into inactivity had increased and outflows fallen, there had been little sign that those without jobs had reduced their attachment to the labour market. In addition, the participation rate of older workers had continued to increase. Further, the number of economically inactive people classified as long-term sick had fallen by around 145,000 following changes to incapacity benefits introduced in October 2008. This increase in labour supply might have contributed to the weakness of pay growth.

The unemployment rate though (which we WON’T mention in the minutes) is at 7.9% – exactly where it was in July 2009, right at the height of the recession. Or in other words ALL our efforts to reduce unemployment have been a complete FAIL.

Productivity had continued to fall in the fourth quarter of 2012, with employment increasing as output fell, adding further to the longstanding productivity puzzle. Information on the output and employment of individual businesses from the 2011 Annual Business Survey and the 2012 English Business Survey had suggested that there might have been unusually high labour retention by businesses whose output had fallen: 20% of all employment in the sample had been in businesses whose output was falling but whose employment was nevertheless broadly flat, double the share immediately prior to the crisis. In previous recessions, which were often associated with tight monetary policy, such businesses might have failed completely. The relatively low rate of company failure in this episode might therefore be one of a number of factors explaining why aggregate productivity had been lower relative to its pre-crisis trend than in previous recessions.

Which means that there a a lot of companies out there that must be on the verge of some large firings if/when the economy doesn’t pick up in the next few months.

There were likely to be two broad explanations of why business failures had been lower in recent years than would have been expected on the basis of their previous relationship with output growth. First, low nominal interest rates had alleviated the financial pressure on indebted businesses, thereby helping them to survive, in contrast to previous recessions which had been associated with tight monetary policy. Second, forbearance by lenders had provided some indebted businesses with the opportunity to continue trading when they might otherwise have failed. It was also possible that the changes resulting from the Enterprise Act 2002 made it easier for businesses in difficulty to carry on trading in current circumstances. Forbearance might have occurred because lenders had been unwilling to write off, or make provisions for, bad loans when their own capital position was weak. But, were forbearance to cease, it was not obvious that the resources currently used by struggling businesses would necessarily be re-employed in healthy businesses. It was possible that less forbearance would lead simply to more company failures, higher unemployment and lower output. Policies to strengthen the UK banking system, such as those recommended by the FPC, together with policies to encourage lending, such as the Funding for Lending Scheme, were intended to bring about a normalisation of credit conditions that would allow capital to flow to where it could be used most efficiently.

And now we present the ‘go to’ excuse of ALL central banks around the world when our policies are shown to have not worked. We’ll just say it would’ve been much worse if we didn’t do anything – of course we present NO evidence in support of this proposition – you’ll just have to take our word for it.

The Committee’s new remit, as set out by the Chancellor of the Exchequer at the time of his latest Budget, reaffirmed that monetary policy should be set to meet the 2% inflation target but in a way that avoided undesirable volatility in output. The new remit also confirmed that the Committee should continue to look through temporary, even if protracted, periods of above-target inflation where it judged that cost and price pressures were consistent with inflation returning to the target in the medium term.

Because pretending that we were aloud to get away with what we were doing under the old remit was starting to raise some eyebrows.

The outlook for activity and inflation remained broadly in line with that set out in the February Inflation Report. After only weak growth in 2012, business surveys suggested that the pace of expansion in the UK economy was likely to remain muted during the first half of 2013. Employment had continued to rise in spite of the weakness of output growth. Retail sales growth had been strong in February and suggested that the pickup in consumers’ expenditure over 2012 might have been sustained. But there had been only tentative signs of a generalised pickup in business investment other than by utilities and in the North Sea oil industry. The impact of the euro-area debt crisis, together with the fiscal consolidation and tight credit conditions at home, were likely to continue to weigh on demand. The reaction of financial markets to the events in Cyprus had been relatively muted, although the risk that bank depositors might also face losses or capital controls in a future crisis might have increased the fragility of the euro area and the associated downside risks. The stimulus from the Funding for Lending Scheme (FLS) and the asset purchase programme were likely to support a gradual recovery, although there had been some signs on the month that the pace of improvement in credit conditions had eased and net lending had so far remained subdued.

And when we say ‘muted’ we mean their’s another recession coming.

Inflation had risen to 2.8% in February, in line with market expectations. It was still expected to pick up to around 3% in the middle of the year. But changes to duties announced in the Budget and lower sterling oil prices had offset upside news from the previous month and meant that the overall outlook for inflation was similar to that published in the February Inflation Report. While pay growth had been subdued, the impact of this on unit labour costs had been offset by weak productivity growth. And administered and regulated prices were likely to make unusually large and sustained contributions to inflation over the next two years or so.

It’s ALL the fault of ‘regulated’ prices – NOTHING to do with money printing.

In line with its remit and to avoid undesirable volatility in output, the Committee had previously judged that it was appropriate to look through the impact of these prices on inflation provided that indicators of cost and price pressures were consistent with inflation returning to the target in the medium term. The Committee continued to expect CPI inflation to fall back to around the target in the medium term as a gradual revival in productivity growth dampened increases in domestic costs, and as external price pressures faded. The pace at which inflation was expected to return to the target was determined by monetary policy; this needed to balance supporting the recovery with bringing inflation back to the target promptly. The short-run trade-off between output growth and inflation meant that the Committee could return inflation to the target more quickly than currently expected only by taking policy actions that would provide less support to output. In responding to this trade-off, the Committee was setting policy in broadly the same way that it had done since its formation.

The medium term is of course a phrase we wheel out month-in month-out and yet NOBODY asks us to define the medium term.

The Committee took note of the recommendations of the Financial Policy Committee that sought to improve the capital adequacy of the major UK banks and building societies by the end of 2013. The Committee agreed that a well-capitalised banking system was essential to improving the supply of credit and the supply capacity of the economy in the medium term. The Committee also saw merit in possible extensions to the FLS that would boost lending further.

Gotta keep that ‘free’ money to the banks rolling.

There continued to be a case for a further extension of the Committee’s asset purchase programme to support other policies that were being deployed: wage growth had weakened further, consistent with there being a significant degree of slack in the economy; the prospects for growth remained subdued, especially given the continued weakness in the euro area; despite their recent rise, market-implied medium-term inflation expectations remained broadly consistent with meeting the target; and the Committee should look through temporary, even if protracted, periods of above-target inflation. Moreover, it was possible that higher demand would itself push up productivity and, if that were the case, higher output need not be associated with a material increase in inflationary pressure. Further asset purchases, by lowering longer-term interest rates and supporting a range of asset prices, could facilitate a smoother path towards the economy’s new equilibrium, help prevent a more persistent reduction in spending, and thereby avoid potentially lasting damage to productive capacity.

Because all we know how to do is print – and print we will.

There were also arguments in favour of maintaining the current size of the asset purchase programme. Monetary policy was already highly stimulatory and the benefit of past actions would continue to be felt: the first rise in Bank Rate was not fully priced into market rates until well into 2016. Inflation was above the 2% target, was likely to rise further later this year, and was expected to remain elevated for an extended period. Medium-term inflation expectations had drifted upwards in recent months, and a further easing might exacerbate this movement and prompt renewed weakness in sterling, with implications for wages and prices. In addition, the extent to which supply capacity would respond to greater demand would depend on how quickly capital and labour could be redeployed from declining to growing businesses. This issue was better addressed by policies to improve the working of credit markets.

We’ve got to pretend that there were arguments against printing otherwise people will start to cotton on to the fact that that’s all we do.

All members saw some merit in each set of arguments, but weighted them differently in forming their view about the best monetary policy setting to bring inflation back to the target in the medium term while continuing to support output and employment.

The Governor invited the Committee to vote on the propositions that: Bank Rate should be maintained at 0.5%;

The Bank of England should maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion.

Regarding Bank Rate, the Committee voted unanimously in favour of the proposition.

Regarding the stock of asset purchases, six members of the Committee (Charles Bean, Paul Tucker, Ben Broadbent, Spencer Dale, Ian McCafferty and Martin Weale) voted in favour of the proposition. Three members of the Committee (the Governor, Paul Fisher and David Miles) voted against the proposition, preferring to increase the size of the asset purchase programme by a further £25 billion to a total of £400 billion.

Let’s try an wait until Carney gets here – he can be the one to usher in more massive money printing.

Bank of England minutes – what they ‘really’ mean

As a reminder the data so far in Q1 2013 has been terrible baring the outlier of the very seasonally adjusted retail sales. This means that to avoid the UK officially heading into an unprecedented ‘triple-dip’ recession March data will have to come in much better than expected.

So how are the March retail sales shaping up? Much worse than expected. From the government funded Office for National Statistics latest report:

• In March 2013, the quantity bought in the retail sector (or sales volumes) decreased by 0.5%. This follows strong year-on-year growth of 2.5% in February 2013 and a year-on-year decrease in January of 0.6%. Quarter 1 2013 does however show an increase of 0.4% compared with Quarter 4 2012.

• The largest contribution to the year-on-year decrease came from the non-food sector, where compared with March 2012, the quantity of goods bought decreased by 2.6%.

And it just wouldn’t be a government economic report if the excuse of weather wasn’t wheeled out a least once:

• March 2013 was the second coldest on record and this appears to have had a negative effect on sales in the non-food sector. Feedback from department stores, clothing stores and household goods stores suggested that sales were dampened by the weather as they prepared their stores for the spring season.

But wouldn’t sales of warm coats of set this? No, it seems the standard excuse for poor economic performance in the UK is to blame the weather cold, hot, indifferent – it doesn’t matter to them), or blame a bank holiday – just as long as the government’s and BoE’s dreadful management of the economy isn’t mentioned as the cause.

• In March 2013, the overall proportion of non-seasonally adjusted online sales remained high at 10.4% reflecting feedback from large retailers, which suggested that during the continued winter weather consumers purchased from their online sites rather than in store.

• The amount spent (or sales values) in the retail sector increased by 0.1% between March 2012 and March 2013. The largest contributions came from the food and non-store retailing sectors.

Bear in mind that monthly inflation came in at 0.3% for the month of March yesterday.

• Looking at the monthly picture, (March 2013 compared with February 2013) the quantity bought decreased by 0.7%, whilst the amount spent remained unchanged at 0.0%.

All-in-all any ‘hope’ from that outlier number in February was in someway a turning point in the economy seems to have some what dissipated after this report.

In particular that ex-fuel numbers were dreadful in March:

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Bear in mind the market was expecting a fall of 0.5%.

We stand by our assessment that when the GDP numbers come out next week it will be touch-and-go whether the UK enters and official unprecedented triple-dip. And for this reason we’re sure the folks at the ONS are coming under a lot of pressure to magic at least a 0.1% number for Q1 2013 just so the headline writers can scream ‘UK economy avoids a triple dip recession’.

Of course this will be completely meaningless because the very poor state of the UK economy can not be covered-up and the difference between a 0.1% print and negative 0.1% is utterly meaningless in reality.

In short, the UK economy is still not recovering.

Retail sales ex-fuel in the UK come in much worse than expected for the month of March

CPI inflation in the UK remained at 2.8% last month – still way above their 2% target rate. It now means that the BoE hasn’t hit their target in nearly 3 and half years. From the release:

• The Consumer Prices Index (CPI) grew by 2.8% in the year to March 2013, unchanged from February.

• The contributions to change in the CPI from the various detailed categories were relatively small compared with most months. The largest upward contribution came from the recreation & culture sector where there were price rises for audio-visual equipment and books, newspapers & stationery.

• The largest downward contributions came from furniture & furnishings, motor fuels and meat.

• The CPI remained broadly flat through the second half of 2012 and into 2013 following a number of years of large increases and decreases. Over the last six months, the CPI 12-month rate has been particularly stable, standing at 2.7% for four months followed by 2.8% for February and March 2013.

Stable yes, but stable way above the 2% target.

The government funded ONS then goes onto spell out very clearly how inflation is essentially a tax:

The CPI 12-month rate (the amount prices change over a year) between March 2012 and March 2013 stood at 2.8%. This means that a basket of goods and services that cost £100.00 in March 2012 would have cost £102.80 in March 2013.

Bear in mind that the BoE is charged with rising prices by 2% a year. Which means that it is the stated policy of government to make a basket of goods and services that costs £100 in March 2012 cost £102 by March 2013. In short it is the policy of government to make ‘stuff’ more expensive. And this is meant to help the poor how?

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Which all means that the BoE have produced way more inflation than they have been legally charged to do. Or to put it another way, the BoE have made ‘stuff’ way more expensive than they should have. How much more? Try 80%:

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So, for the BoE to get back to target the CPI could come in at zero each and every month for the next two years and they still would have produced too much inflation.

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As the CPI remains at 2.8% last month the BoE has created 80% ‘extra’ inflation in the past three years