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.“
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.”
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.”
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.
It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
One Response to “More Euro Area Downgrades and Another Spike In UK CPI”
Most read in the last 20 days:
- A Striking Chart
The Economy and the Stock Market As long time readers know, we are always paying close attention to the manufacturing sector, which is far more important to the US economy than is generally believed. In terms of gross output it is the largest sector of the economy, and it should of course be obvious that saving, investment and production are the only ways to create wealth. What's left of the Brooklyn Domino Sugar Refinery. Photo credit: Paul Raphaelson Contrary...
- Trump and Putin Narrowly Escape Assassination Attempt
The Gloves are Coming Off First a little bit of recent history. Readers are probably aware that some questions about the occasionally malfunctioning Deep State android... no, wait, we'll start again. Questions have recently been raised about the health of presidential candidate Hillary Clinton by various “alt-right” tinfoil hat-wearing conspiracy theorists, such as this one. The monsters are normally hiding under Hillary's bed, but lately they have come out into the open...
- Donald’s Electoral Struggle
Wicked and Terrible After touting her pro-labor union record, the Wicked Witch of Chappaqua rhetorically asked, “why am I not 50 points ahead?” Her chief rival bluntly responded: “because you’re terrible.”* No truer words have been uttered by any of the candidates about one of their opponents since the start of this extraordinary presidential campaign! Electoral map (note that the coloration may no longer be applicable...) That Hillary Clinton is...
- Why the Fed Destroyed the Market Economy
What Have You Done for Me Lately? Swing voters are a fickle bunch. One election they vote Democrat. The next they vote Republican. For they have no particular ideology or political philosophy to base their judgment upon. The primacy of the wallet. They don’t give a rip about questions of small government or big government. Nor do they have any druthers about the welfare or warfare state. In effect, they really don’t care. What’s important to the...
- Janet Yellen’s Shame
Playing Politics In honest capitalism, you do what you can to get other people to voluntarily give you money. This usually involves providing goods or services they think are worth the price. You may get a little wild and crazy from time to time, but you are always called to order by your customers. In the market economy, consumers reign supreme. There is no such thing as a “lost” vote in the marketplace; every penny spent affects production. Mises noted: “Consumers...
- Get Ready for a New Crisis – in Corporate Debt
Imposter Dollar OUZILLY, France – We’re going back to basics here at the Diary. We’re getting everyone on the same page... learning together... connecting the dots... trying to figure out what is going on. The new three dollar bill issued by the Apprehensive States of America. We made a breakthrough when we identified the source of so many of today’s bizarre and grotesque trends. It’s the money – the new post-1971 dollar. This new dollar is green. You...
- The Economy, the Stock Market and the Fed
John Hussman on Recent Developments We always look forward to John Hussman's weekly missive on the markets. Some people say that he is a “permabear”, but we don't think that is a fair characterization. He is rightly wary of the stock market's historically extremely high valuation and the loose monetary policy driving the surge in asset prices. The S&P 500 Index and the NYSE advance-decline line. Most market internals weakened steadily until early February 2016, but...
- Hanjin Marooning in San Pedro Bay
Global Trade Reversal Expansions and contractions in global trade have played out over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC, and allowed for continuous trade between East and West for nearly 1,600 years. In addition to economic trade, the Silk Road was also a conduit for culture and knowledge among its network of civilizations. A map of the main ancient Silk Road - click to...
- Great Causes, a Sea of Debt and the 2017 Recession
Great Cause NORMANDY, FRANCE – We continue our work with the bomb squad. Myth disposal is dangerous work: People love their myths more than they love life itself. They may kill for money. But they die for their religions, their governments, their clans... and their ideas. Famous French hippie and author Voltaire. He wears the same sardonic grin in every painting, whether he's depicted at a young or an old age, doesn't matter. His real name was François-Marie Arouet; he...
- The Donald Versus Killary: War or Peace?
War: A Warning from the Past Although history does not exactly repeat itself, it does provide parallels and sometimes quite ominous ones. Such is the case with the current U.S. Presidential election and the one which occurred one hundred years earlier. The Donald probably has the better slogan... The dominating question which hung over the 1916 campaign was whether the country would remain neutral in regard to the horrific slaughter which was taking place on the...
- A Rift in the Space-Time Continuum
Weird and Unnatural NORMANDY, France – First, a quick look at the markets. The Dow bounced on Monday, recovering 239 points of the nearly 400 it lost on Friday. Why the comeback? FOMC member Lael Brainard: her comments on Monday were touted as the “reason” for the stock market recovering half of Friday's losses. We suspect the real reason is the triple witching on Friday... Photo via twitter.com The financial press has a ready answer: “Stocks gain...
- Crimea: Digging For The Truth
Renewed Escalation This summer witnessed a renewed escalation between Russia and Ukraine after Russian President Vladimir Putin accused Ukraine of sending saboteurs to attack Russian troops, targeting “critical infrastructure”. Kiev denied the allegations and claimed Russia’s “fantasy” was nothing but a false pretense to launch a “new invasion”. August 10: Russian president Putin announces that there was an altercation involving a group of Ukrainian saboteurs at...