pro manchester CEO

Why more QE is the wrong policy option..

The UK is in a liquidity trap, a situation where monetary policy is unable to stimulate the economy either through lowering of interest rates or increasing money supply.  Liquidity traps occur when rates are reduced to the zero bound or thereabouts and cannot be reduced further. In real terms UK rates (base rate minus inflation) are negative 4%.

The liquidity trap is compounded when expectations of adverse events, either deflation or in the current situation, a lack of aggregate demand, are manifest. Firms are loathe to invest, households are constrained to spend, government spending is limited by a desire to resolve the debt crisis.

The first round of Quantatitive Easing was essential to improve liquidity in the banking system at a time of crisis. Inter bank lending was dessicated, LIBOR spreads were extending. The central bank was becoming not just the last lendor of resort but the only lender of resort. Action had to be taken to inject cash into the economy by undertaking a series of asset purchases predominantly gilts. The programme of some £200 billion almost 14% of GDP had to be done.

This is not an argument for more asset purchases, for the exercise came at a price. QE forces up bond prices, pushes yields lower, punishes savers, places more pressure on sterling, increases import prices, leads to higher inflation, greater pressure on real incomes, a reduction in household spending, reduces demand and leads to lower growth.

Ten year gilt yields have fallen to 2.4% and thirty year gilt yields have fallen to 3.5%. Policy makers assume that lower interest rates at the longer end of the curve will lead to a higher level of investment. This is not the case. Any return on investment or payback calculation is a function of cash flows from a determined demand horizon. Cost of capital does not feature in the basic model. Until the uncertainty about the forward level of demand and growth is cleared, investment plans will remain on the shelf.

In 2008, I wrote :  Welcome to planet ZIRP. Unfortunately, we do not have a handbook, or fully understand the terrain. Our process of quantative easing, the plan to helicopter money may work but as a fire fighting option, it may be like dropping water into a desert, such are the fissures in the financial system."

In 2004 a Bernanke paper  “Monetary Policy Alternatives at the zero bound” concluded :
“Despite our evidence that alternative policy measures [QE} have some effect, we remain cautious about relying on such approaches. We believe that our findings go some way to refuting the strong hypothesis that nonstandard policy actions, including quantitative easing and targeted asset purchases, cannot be successful in a modern industrial economy.  The effects of such policies remain quantitatively quite uncertain”.

The Bank of England suggests that QE increased GDP by between 1.5% - 2.0% but also led to an increase in inflation of between 0.75% and 1.5%. [Joyce M et al in the September Bank of England Quarterly Bulletin.]

At best, QE2 round of £50 billion would kick growth by just 0.4% and inflation by over 1% on a pro rata basis according to the banks own figures.

One cannot be entirely confident in the bank’s hypothesis. QE led to a fall in gilt yields as a first round effect but thereafter the relationship betwen QE and the effect on growth and inflation is tenuous. The argument for further QE is intellectually weak and at best the potential economic impact minimal. The risks outweigh the return.

In fact we would argue that a further round of asset purchases would merely oil the liquidity trap, digging a deeper hole, increasing the inflationary impact and reducing growth as investment plans are reigned back and household incomes are placed under greater strain. Sometimes the correct action is to do nothing, especially when it is more of the same toxic solution.

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The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

Regeneration is more than a phase - The Times Business Insight today

The danger when we think of regeneration is to think of it as a phase. It is not a phase, it is a continuum, a constant process of Darwinian evolution and adaptation. It is a slow and steady process but it is a RAPID movement, one in which businesses and economies,  React, Adapt, Plan, Invest and Develop.

The problem with the French as George Bush might have said, is they don’t have a word for Renaissance, or if they do it is a bygone era, a phase long discontinued. Regeneration is a constant ongoing process. It is what we do to survive.

At present businesses and economies in Manchester and the North West are having to react and adapt to a economic outlook which offers low growth and a higher level of inflation. One in which incomes are squeezed by higher food, energy and utility prices putting real incomes under pressure for the foreseeable future.

A government policy aimed at rebalancing the economy involving the march of the makers, rebuilding the workshop of the world is a novel trope. The desire to rebalance the economy and an external deficit which has been out of synch since The Treaty of Versailles and beyond, is misplaced.

A monetary policy, which undermines the exchange rate, leads to a depreciation of Sterling and generates price inflation compounds the problem, more QE will compound the problem. The private sector has to accept the challenge, of policy priorities misplaced.

Nevertheless, across the North West examples of regeneration apply. Blackpool Pleasure Beach continues to invest heavily in new initiatives to stimulate traffic to the award winning site. Nickelodeon land is open and SpongeBob’s Splash bash is there to welcome all.

In Liverpool, the huge investments on the waterfront continue, with the opening of The new Museum of Liverpool. It is the largest newly-built national museum in the UK for more than a century.

Across the road from the Museum and the Liverpool One Shopping Centre is a brand new development with more than 160 high street stores assisting the regeneration programme for the city.

Moving East and the Atlantic Gateway is a framework for collaboration between Manchester and Liverpool city regions. The challenge of the Atlantic Gateway is to become one of Europe’s leading low carbon, economic growth areas, second only to London.

Further East and the finishing touches are being made to the future new home of Salford Rugby League Club. Salford City Council formed a joint venture company with Peel Holdings to develop the £16 million stadium, seating 20,000.

It is in Manchester where the best examples of regeneration can be found, setting an example for the North West and the UK. Plans for the integration of the city transport network continue with an extension of the modern and impressive tram system across the city and into the travel to work areas.

In new industries, the city sets the example with new industries encompassing digital, media and creative well blessed with Media City in Salford and Trafford, the Sharp project in East Manchester, the Hive and Corridor projects in the city centre.

Incubators thrive in the developments within the University, including UMIC, the Manchester University Innovation Centre and Manchester Science Park.

The cranes hover again over Manchester as the plans for the Co-operative bank NOMA development take shape. NOMA,  comprises a 4 million square feet, 20-acre mixed-use project. Further East and the £100 million investment in the Manchester City FC academy has recently been announced. It's a great project for our city.

The Nobel prize for physics in 2010 was awarded to the university’s Andre Geim and Konstantin Novoselov for the groundbreaking development of Graphene. The real challenge now to grapple with graphene and develop marketetable products capitalising on the inherent strengths of the product.

Manchester has developed as a modern service sector economy with a very strong business,  professional and financial services sector. pro.manchester is the members organisation for this important sector in the city. It represents the largest advisory group in the North West. This month we launched our SME club, a free advisory service for businesses in Greater Manchester and beyond. Why? Manchester is a great community, we all want businesses in our city to survive and thrive as part of the regeneration process. JKA

This article was originally published in The Times Business Insight on the 27th September 2011.

Sign up today and "subscribe" for e-mail notification of updates. Or follow me on Twitter @jkaonline , join a great network on LinkedIn or Circle me on Google+.

The views expressed are my own and in no way reflect pro.manchester policy. In no way should the comments be considered as investment advice or guidelines or reflect political bias. UK Economics news and analysis : no politics, no dogma, no polemics, just facts. JKA is a visiting professor at MMU Business School, an economist and specialist in Corporate Strategy, educated at LSE, London Business School with a PhD from Manchester Metropolitan University.

Sunday Times and Croissants - CEO's update 25th September

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. What a week! Headlines, the global economy is pushed to the brink according to the Saturday FT but within 24 hours the G20 announced a three trillion deal to save Euroland. Even the Greeks get to stay but with a haircut. David Smith suggests we should pick a pump to rescue recovery. Not more QE says DS, it is good call. 

This week, the LIb Dem conference. Vince Cable talks of a gear change in Whitehall, a reference to dress down Friday as opposed to any change in economic policy, as hints of an infrastructure spend are knocked back by the Treasury. We are in a crisis, says Cable, it is the economic equivalent of a war, building from the rubble, the people need to be told the truth, there is no Father Christmas. Ouch! Politicians can be so brutal.

According to Vince Cable, the world is in a difficult place. Plans are afoot to relocate to another part of the Galaxy, where the gravitational pull of sovereign debt on growth is much lower.

The head of the World Bank warned the world is in a dangerous zone thus ruling out relocation within the Milky Way as a short term solution. The IMF World Economic Outlook produced a down grade for growth in the world and the UK. The elegant Christine Lagarde gets the terminology right suggesting the world is in a difficult phase. Here but not forever.

Economics news this week, the borrowing figures were not great for the Chancellor, the worst August figures since the abacus was created. Targets will be missed, we need growth to make the numbers work. Otherwise, automatic stabilisers kick in, reducing tax receipts and pushing up spending. Why do they call them stabilisers when they just upset the debt reduction plan?

Hints from the Bank of England of more QE in November, as much as £50 billion. QE forces up bond prices, pushes yields lower, punishes savers, places more pressure on sterling, increases import prices, leads to higher inflation, greater pressure on real incomes, a reduction in household spending and possibly lower growth. What is the point of more QE, we might as well give the money to a group of UBS traders.
Policy makers genuinely believe that ever lower interest rates will stimulate investment. Not one, can ever have ever done a payback calculation, in which return on investment is a function of cash flows from a defined demand horizon in which cost of capital is irrelevant. Eliminate uncertainty, offer growth, only then will investment return.

What is happening to markets? The FTSE closed the week at 5067, marginally above the critical 5,000 level. Which way next, it is a fifty fifty call. (See what I did there?) Ten year gilts are 2.4% and thirty year gilts yield 3.5%. Something is wrong, it is like the tide receding from the beach before the Tsunami. A desiccation of yield and liquidity. Say no to more QE on planet ZIRP. Google - planet ZIRP - for more information.

By the end of the week, more economics humour as the Chancellor lectures Europe re inaction on debt and Greece. Osborne warns that patience is running out and the eurozone has six weeks to sort out the problem. He even asked on Friday where do the Europeans think the growth will come from? Now, that is a good question, not from net exports, the march of the makers and capital investment, that is for sure. Qui s’appelle la bouilloire noire, monsieur George?

Back to the day job, on Monday, Robert Chote Chairman of the Office of Budget Responsibility is with us for a private lunch which included Sir Richard Leese, Robert Hough and a trio of Chairman past, present and future of pro.manchester. The OBR revised forecast for the UK economy is due in November. Robert spoke candidly and off the record.

Tuesday a day off to meet with two old friends and former Coloroll Directors, Jeremy Sholes and Bill Dobie. Bill is 82 and recently had a severe heart attack and near death experience. Cholesterol - as a Scot and a great bag pipe player, Bill looked well as he tucked into Stuffed Mushrooms, Calves Liver and Onions, excellent. We reminisced and recalled great moments.

Wednesday and early start for an economics presentation at Colliers. Walter Boettcher chief economist depressing everyone with his overview. Walter placed some hope on QE2 for recovery but according to the Bank’s own dubious calculations, 50 billion would kick the economy by less than half of one percentage growth. Not sure Walter really believed it anyway.

Later a meeting and lunch with Chris Bagley from the Federation of Small Businesses. Chris will be a great ally for SME club. Lunch at Rossos, Forty Quid for two. Not bad.

In the evening, launch of the future pro·manchester Professional Innovator Challenge at MOSI, the Museum of Science and Industry. Mark Rock, founder of AudioBoo made the keynote presentation. Sponsored by Beever and Struthers the challenge promotes innovative flair in financial and professional services in the city. future.pro manager, Sam AudioBooth recorded the first pro.manchester boo ever. Great stuff.

Thursday, early start for the pro.manchester plenary board meeting at Deloitte. All over within the hour. Excellent. Time for a lie down before the BDO dinner at Manchester City in the evening. Hugely impressive venue and key Manchester City execs outline their international plans for the club and the brand over the next ten to fifty years. Thanks to Jeff Jones and the BDO team for the invitation.

Friday and it is the Marketing Manchester Tourism Awards lunch at the Lowry Hotel. A three hour session with fifteen awards. Drew Stokes and Paul Simpson presented with Eamonn O’Neal from MEN media anchoring the show. I am on a great table between Angie Robinson and the Linda Thomas, Deputy Leader of Bolton Council. Great fun. I am a thorn between roses. Excellent event, it is my first visit.

End of the day close of polling for the pro.manchester Business Conditions Survey, sharing the data with Brian Sloan from the Chamber of Commerce to finish the week.  Finally, a quick check on Google Earth to see if Greece is still there, it is.

Tennis on Saturday and later today, a family gathering for the christening of Emily, our first grand child. Should be a fun afternoon,

Hope all is well with all, more news next week,
John
John Ashcroft
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Sunday Times and Croissants - CEO's update 18th September

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines today, Cable clamps down on top pay. Don’t get this. All the fuss about the 50p tax rate and the Secretary of State for BIS wants top executives to pay less tax.

If this were my business, bearing in mind the Treasury take on top pay including NI is over 70% I would not push this agenda item, just at this time. David Smith writes on the scramble for recovery and suggests we are firmly in the something must be done territory. Leaving top pay alone should be added to the list.

Ed Milliband had a rough ride at the TUC conference this week. Milliband said he believed it is a mistake for strikes to happen. Shouts of shame and rubbish the acclaim, only one woman stood up, then to go to the toilet, charisma delusion manifest throughout. Only sixty per cent of labour voters think their leader can be Prime Minister according to a Times poll. Who would have thought there were so many optimists in the Labour party?

Economics news this week, UK inflation, retail sales, trade and unemployment all heading in the wrong direction. Christine Lagarde offers a veiled warning to the Chancellor about overdoing austerity, David Smith hints at the need for a Plan B, the Treasury is getting jumpy and Danny Alexander warns of a long slow road to recovery.

Meanwhile, the Chancellor in Manchester on Friday, oblivious to the problem, continued his assault on rhetoric, speaking of a budget on our terms, not on the market terms, weathering the storm, ahead of the curve with a plan designed for good times and tough times, helping business to survive and thrive. Excellent.

Merkel and Sarkosy give the Greek Prime Minister Papandreou a telephonic hug on Wednesday, then told him he couldn’t have any money until October. It is a sort of high finance, love you, love you not, game, in the form of Das Hahnchen, Poulet or kotOpouloo. All this despite the warnings from Tim Geithner of catastrophic risk in delaying a decision to bail out the Greeks. The Sunday Times outlines the option of Acropolis now or kick the can down the road yet again.

Arrests this week at UBS as trader Kweku Adoboli manages to lose two billion dollars in subtle trades going back to 2008. How do you do that? Easy, work in a team called Delta one, trade ETFs and bet ten billion. Simps.

Three economists at UBS who suggested the collapse of the Euro would lead to war, death, pestilence and famine should have been arrested. Collapse would lead to debts equivalent to 25% of GDP in the main Euro economies, they say, not a 25% collapse in GDP as was suggested by Portillo at the BVCA Dinner on Thursday night.

The main message of the UBS paper, the Euro is too big to fail. Never forget the German economy is the biggest beneficiary of the fixed currency system, with an enormous trade surplus bigger than that of China.

Back to the day job, on Monday, Alex Connock called in to discuss his new venture and possible options for finance. Tuesday, Gateway breakfast and the formal launch of SME club with Sir Richard Leese pressing the big red button to launch the site. Thanks to everyone who attended and helped the launch. SME club is an important development for our city, it is going to be huge.

The launch was a symbolic moment, no time for cliches, the hand of history was on our shoulder. But punching a button achieves nothing, unless we act  like a team of synchronized swimmers, in the same pool, on the same wavelength, moving with precision timing, to the same music, splashing in the right direction, ahead of the waves, with a plan designed for low tides and high tides, helping businesses to survive and thrive. Yeah, I can do this.

Thursday a briefing meeting with Paul Lupton, chairman of pro.manchester, prior to the board meeting next week. Later a meeting with Aegis, BPO, (Business Process Outsourcing) specialists, the latest coup for Midas bringing a potential 600 jobs into the city centre in 2012.

Thursday evening the BVCA dinner in Manchester, five hundred at the Hilton hotel. I am a guest of Mark Florman Chief Executive and the BVCA  chairman. A great evening with Mark Advani from ISIS and the guys from Baird Capital Partners on the table. Michael Portillo was the guest speaker sharing his Portillo moments, fifteen minutes stand up, then fifteen minutes comedy as he talked on economics, needlessly spooking the audience with misquotes from the UBS paper.

Friday and 600 words for a Times article on regeneration. I point out, the trouble with the French, as George Bush might have said, is they do not have a word for renaissance.

On a geek note, I am migrating to Google Chrome. With Safari, I am seeing more spinning wheels than a Las Vegas casino, it is worse, since the Lion  OS update. Is anyone else having a problem?

Hope all is well with all, more news next week,
John
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Sunday Times and Croissants - CEO's update 11th September

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. Headlines today, the 50p tax rate raises nothing. No surprise in the news but we will have to wait for the official HMRC report next year before the Chancellor will address the issue. Twenty economists have written to Number 11 urging abolition.

Unfortunately, this has nothing to do with economics just a manifestation of a coalition government conflicted between the dogma of envy and the pragmatic of policy.

David Smith expresses concerns about growth and the need for a Keynesian boost to capital and infrastructure spending. Yes, the recovery is off track as our recent Economics Quarterly suggested.

Economics new this week, producer prices on Friday suggest the peak in input prices may have passed as the rate of change falls to 16% in August from 18% in July. Other news confirms the slow down with the OECD suggesting growth for the UK of just 0.3% in the final quarter of the year. The march of the makers may yet give way to the march of the corporate undertakers, if we are not careful.

This week, I read the Alistair Darling book, Back from the Brink. You have to admire the way in which both Darling and Brown reacted to the banking crisis. The Governor does not escape criticism having been slow to react, deemed out of touch with the banking sector and overly obsessed with moral hazard and a reluctance to bail out the banks. So much for the lender of last resort.

Phillip Stephens writing in the FT on Saturday suggests the former chancellor has written a refreshingly unvarnished account of what happened, revealing just how close to complete financial shutdown we were. It is a gripping tale, told well, he says and it is.

The book touches on the HBOS merger, apparently the Bank of Scotland referred to the Halifax managers as the Haliban. So much for post acquisition team building.

Physically, Darling is easily recognised by his shock of white hair contrasting with his deep black eyebrows. On a visit to China, he was asked if he actually dyed his eyebrows. Since they have the appearance of large black hairy, caterpillars, no surprise had he been asked if they were on the menu for the state banquet that night.

Darling cautions, quite rightly, that Chancellors have to show humility and honesty to gain the respect of the voters. It is true, Chancellors should demonstrate a high degree of economic competence along with intellectual honesty and integrity, avoiding cliches and sound bite were possible.

Recent speeches from number eleven include back from the brink of bankruptcy, the march of the makers, ahead of the curve, offering a safe haven, on a rock of stability, masters of our own destiny, executing plans designed in tough times for tough times, acting first like a tug of war team pulling in the same direction, then like a football team, playing in the right position. We will not win anything if we all charge ahead in the same direction, we would just let in goals at the back. Excellent.

Back to the day job, On Monday I was in London to meet with NIESR the National Institute of Economic and Social Research. Jonathan Portes is the new Director, previously, Chief Economist at the Cabinet Office. NIESR will help with the table output for the Economics Quarterly Review in future.

Later a meeting with Mark Florman the new CEO of the BVCA. It is good to meet Mark having enjoyed a great relationship with his predecessor Simon Walker, now at the IOD.

In the afternoon tea and sherry at the House of Lords with Lord Wade and Baroness Wheatcroft. It is always great to visit the upper house and catch site of Lord Lawson of Blaby and Baron Bannside (Lord Paisley) and others.

Tuesday, lunch presentation with the British Israeli Chamber of Commerce. Gideon Klaus had asked me to talk about pro.manchester and the potential business propositions between Tel Aviv and Manchester.
Gideon works so hard for the Chamber and Brian White was in the Chair. My thanks to them.

In the evening, reception at Harvey Nichols for the new Chairman. Two hundred and fifty people turned up to enjoy the evening and to hear Paul Lupton outline his plans for the year in office. It was a good evening and for pro.manchester a different venue. 

Wednesday an evening dinner with MCR  and their guests Barclays special situations team. MCR have just been appointed to the Barclays panel and listening to me talk about the British Economy was their special treat, that and a great meal at the Restaurant Bar and Grill. How lucky can some people be!

Thursday almost one hundred people turned up for the members briefing on SME club, thanks to Deloitte for hosting the event. We outlined the plans and ideal engagement for member companies.  Gina and the e-team, have done a great job to pull the programme together for the formal launch next week.

Just received an e-mail from Al Mackin at the e-word, he has not received his Sunday missive yet, concerned Tesco may have run out of croissants, as if! Here it is.

Hope all is well with all,
More news next week,
JKA

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Sunday Times and Croissants - CEO's update 4th September

There is something special about Sunday morning, the Sunday Times, hot croissants with honey and butter, excellent. This week-end Mary and I,  are in London, no need to trek out for the paper or food. Room service, how convenient, must speak to concierge at the Edge.

Headlines, from the Sunday Times, Gordon Brown believed the financial crisis would be over in six months, the Governor, the lender of last resort, did not really want to bail out the banks (moral hazard) and Fred Goodwin brought panettone to the Chancellor as a quid pro quo for the bail out. Now there is a deal maker.

Yes it is  Alistair Darling making the headlines with his new book, Back from the Brink, 1000 days at Number 11. He describes the Governor as stubborn and exasperating,  Gordon Brown as brutal and volcanic, management as chaotic and crisis ridden. Hardly reassuring and a lot to be said for a thirty year rule (cabinet papers) applying to political biographies.

Economic new this week a bit thin on the ground. Opinion polls and surveys are gloomy about household sentiment and manufacturing output. David Smith picks up the point with some cautionary words on trends in polls.

Back to the day job, on Tuesday, Mark Halliwell from Gateley called in to talk about the business angels projects and the work of CENBAR the centre for business angels research. Mark is an old friend and it is always good to see him.

Later in the afternoon a meeting with RBS to finalise the details of sponsorship for SME club. A tough two hour session with Rob Pailin and Mark Andrews, emerged bruised but fingers intact.

Wednesday, final draft of my discussion paper - Understanding the Balance of Payments - Forty Years of UK Trade 1970 - 2010, hoping to get this out later in the month. It is as exciting as the title
suggests, another riveting read, might go for the Darling book after all.

Thursday a meeting with the New Economy discussing options for a research paper into early stage VC finance. Jonathan Diggines in the room together with Mike Emmerich, great fun. Do not mention intervention but someone did.

Friday a meeting with the e-team to discuss the SME club launch followed by a visit to the dentist. The SME club launch is ten days away and we had another great session to move this forward. Some excellent video clips captured from the team. Final session looms. My thanks to all.

Later today, off to see the boys, girlfriend, partner and my new grandson. It will be a great day. The sun is shining. Dinner in Canary Wharf the plan.

Hope all is well with all,
More news next week, JKA

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