It's Still Hailing Downgrades

Tuesday saw Europe hit by another slew of downgrades. Moody's followed Fitch and S&P and downgraded Spain – by two notches. As reported by DailyFX:


„In its rationale for the downgrade and negative outlook, Moody’s cited the absence of a solution for the European debt crisis and the worsening economic outlook for Spain. The agency lowered its forecast of 2012 GDP growth from 1.8 percent to 1 percent on continued softness in the labor market and “the difficult funding situation for the banking sector.” While acknowledging Madrid’s efforts to reform the labor market and introduce a balanced-budget constitutional amendment, Moody’s expressed “serious concerns” about regional government deficits and voiced doubt about the general government sector’s ability to meet “ambitious” fiscal targets.“

 

(emphasis added)

 

We have previously mentioned that we think that Spain's central government deficit has been prettified with a simple accounting trick – the government cut remittances to the regions by 16%, which means that deficit growth has been shifted to them – but it has not disappeared. We moreover continue to believe that after the inevitable Greek default, Portugal will be the next country to come to the market's attention. It is inconceivable to us that Portugal's growing problems won't have an effect on neighboring Spain and we expect the downward spiral to accelerate once Portugal becomes a market focus.

Meanwhile, S&P also continued to hand out downgrades, this time to 24 Italian banks. Here is the summary of S&P's statement:


Renewed market tensions in the eurozone's periphery, particularly in Italy, and dimming growth prospects have in our view led to further  deterioration in the operating environment for Italy's banks. We think funding costs for the banks will increase noticeably because of  higher yields on Italian sovereign debt. Furthermore, higher funding  costs for both the banking and corporate sectors are likely to result in  tighter credit conditions and weaker economic activity in the  short-to-medium term. We are revising downward our Banking Industry Country Risk Assessment (BICRA) on the Republic of Italy (unsolicited ratings, A/Negative/A-1) to  Group 3 from Group 2, and lowering the economic risk score, a  subcomponent of the BICRA, to 3 from 2. We are taking negative rating actions on 24 banks and financial  institutions and affirming our ratings on 19 banks.”

 

(emphasis added)

Once again we see here how the problems of the euro area's sovereign debtors continue to redound on the banking system in a vicious spiral.

 

UK Inflation – Time for the Next 'Dear Chancellor' Letter

Mervyn King must get his letter writing equipment out again. UK CPI 'inflation' was reported to have hit a new high of 5.2% in September – the very month when the Bank of England announced an additional 75 billion pounds in 'quantitative easing', better known as 'money printing'. Apparently, QE isn't really the appropriate method for achieving the BoE's 'inflation target in the medium term' as chancellor of the exchequer George Osborn opined in his recent hilarious and rather Orwellian letter to Mervyn King in which he assented to the latest iteration of 'QE' (see our previous report on this, 'The ECB and BoE Decisions, Monetary Pumping Resumes'). 

After the recent CPI report, it is time for King to once again write a letter to Osborn to 'explain' why a 0.5% interest rate and a vast money printing operation are not to blame for the outbreak of stagflation in the UK.

As the WSJ reports, the higher rate of CPI will impact government spending considerably as well – luckily for retirees,  widows and orphans it came at the 'worst possible time' for the government:


The surge in the U.K.’s consumer price index to 5.2% in September may be painful for squeezed Britons, but it’s also galling news for Chancellor of the Exchequer George Osborne, who is battling to bring down the country’s budget deficit.

The record acceleration in the CPI rate could not have happened in a worse month because September’s inflation numbers are used to set the increase in social security benefits and the state pension for the 2012/2013 financial year.

Back in March when official budget watchdog the Office for Budget Responsibility set its forecasts for the U.K.’s public finances, it used the projection that inflation would be 4.3% in September. With inflation now running at almost a percentage point higher, it means that Mr Osborne’s task of hitting his fiscal targets just got harder.

The Institute for Public Policy Research estimates the government’s spending on pensions and other benefits will now be £1.2 billion higher in the 2012/13 financial year than the OBR estimated in March.

The think-tank’s senior economist Tony Dolphin says adding to the higher-than-expected social security bill is the recent rise in unemployment. The Institute for Fiscal Studies, an economics research institute, estimates the bill could be as high as £1.8 billion.”


This could never happen in the US by the way, where manipulation of CPI by government statisticians in order to keep down 'COLA' expenses has been honed to a fine art.

The Telegraph meanwhile reminds Mervyn King of a warning recently uttered by Paul Volcker regarding tolerating rising prices for too long:


“Ouch! It's even worse than we thought – or perhaps that should read what forecasters thought. For most of us, news that CPI inflation last month reached 5.2pc won't come as much of a surprise; it's been obvious from our utility bills and shopping baskets for some time now. The older, RPI measure of inflation is worse still, at 5.6pc.

And still the Bank of England likes to pretend it's trying to meet the inflation target. More monetary stimulus in the form of a further £75bn of "quantitative easing", with the inflation rate at 5.6pc? If the economic bind the country finds itself in were not so serious, it would be almost laughable.

Everyone expects inflation to come down sharply over the next year, as the current round of fuel price increases and the January hike in VAT work their way out of the index, but then the Bank, the Government and most City analysts have consistently underestimated inflation for the best past of the last three years. What reason do we have to believe them now?

[…]

“Here's Paul Volcker, the Federal Reserve chairman credited with finally exorcising the inflation of the 1970s and early 80s from the US economy, writing recently in the New York Times.

My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.

No, inflation is never an economic panacea. Nor does it even help with the debt burden. If wages aren't matching inflation, then it is of no help in eroding the nominal value of household debt, and if taxes aren't keeping pace with inflation, then the same goes for government debt. Worse, many forms of government spending, most notably the bulk of benefit entitlements, are linked to inflation, so that we now have the absurdity of benefit claimants being better protected against price increases than wage earners.

These figures are not just uncomfortable for the Bank of England and the Government. They are a disaster.”

 

(emphasis added)

Amen.

King's constant assertions that the BoE's easy money policies cannot possibly be held responsible for this outbreak of 'stagflation' are indeed ridiculous. Does he really believe that if the BoE stopped expanding the money supply prices would still rise anyway? This is actually a mathematical impossibility. There can not be a rise in the 'general price level'  if the money supply is held constant. If some prices rise, others will have to come down.  It should be obvious that the central bank's policies are the main factor behind the price increases over the past two to three years.

However, worse even than the rise in consumer prices is the fact that relative prices in the UK economy keep being distorted by these monetary interventions. Instead of 'helping' the economy as King continually avers, the BoE's policy is helping to destroy even more scarce capital.

Living standards in the UK are thus set to continue their decline – and no-one should be surprised that there is the occasional riot breaking out lately. This is what welfare statism based on a fiat money system inexorably leads to – it not only destroys the economy, it also undermines people's morale and morals.



 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “More Euro Area Downgrades and Another Spike In UK CPI”

  • roger:

    Maybe slightly off topic, but as you mentioned morals at the end, I might as take a closer look into the aspect of morals. It has been one of the questions lingering in my head for long. My question is: in economics, where is moral’s place? Is it a mere byproduct of how well the society is doing or is it a type of wealth as well? Or is it something else entirely different that does not have a definite place?

    Superficially, it does appear as a byproduct/symptom of how well economically the society is. Riots tend to happen when there’s economic deterioration. The more deterioration, the more violent the riot and the lower the morals of the people involved in. That is what generally happens, although there are exceptions, such as Japan.

    But if we look at it from another perspective, moral is also a component of the well-being of the society. Provided 2 societies w/ the same material wealth, one society whose morals are higher is the more well-off from the 2. And there will indeed be a difference (no 2 societies have the exact same moral values) because cultural differences is a significant factor in determining the morality of a society. Viewed from this angle, moral is also a type of wealth.

    From the perspectives I have presented, which is the more correct? To this, I would like to bring out a post Mish had yesterday:
    http://globaleconomicanalysis.blogspot.com/2011/10/must-see-heart-wrenching-video-of-moral.html

    Is this only a symptom of economic deterioration or does it also tell us that this is one type of wealth that China lacks?

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...

Support Acting Man

Item Guides

Top10BestPro
j9TJzzN

The Review Insider

Austrian Theory and Investment

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com

Diary of a Rogue Economist