Feeling good but not about lending

Economics news – Feeling good but not about lending ...

Latest government research shows, if people are in health, in work and in love, preferably living with someone (the loved one even better), the national well being scores soar. If you are educated, that's tough, - higher levels of education create greater levels of anxiety - ah yes - ignorance is bliss. And what of kids? Children of any age, have no impact on anxiety levels apparently. Hard to believe, so much for research bias! Is this really survey money well spent? It doesn’t make me happy thinking about it.

Great set back to national well being, in the Bank of England, lending stats this week. “Lending to business plummets” according to The Times mid week. Lending to business fell by £3 billion in April, to a level of £470 billion. Actually, it was more of a plop than a plummet, a fall of around 0.5%, as lending to small businesses fell by £700 million. Banks blamed a lack of demand amongst borrowers, business leaders were a little more circumspect. Does this mean FLS is failing?

The funding for lending scheme is an ambitious sales promotion tool in a moribund market. Credit supply does not a recovery make. Money supply M4 increased by 4.8% in April, no dramatic change but a continued demonstration that liquidity is not a problem within the economy, domestic demand is the real challenge.

Banks are using FLS each in their own special way, some to tighten spreads, some to ease arrangement fees, and some as a simple cash back model for capital investment. Buy a fork lift truck and get 10% cash back, that sort of thing. Try fitting that into the Bank of England, monetary transmission mechanism, it would make a PhD’s eyes pop.

As for eyes popping, is the answer to Britain’s economic problems another round of sterling depreciation? asks Sam Fleming in The Times today. Mike Amey, Managing director of Pimco, suggests the incoming governor of the Bank of England, may seek to weaken sterling against the dollar in an attempt to stimulate exports. Calling $1.37 as a reasonable target, Amey suggests another round of QE could effect the currency shift. Let’s hope not.

Even Charlie Bean the deputy governor of the Bank of England, is becoming sceptical about the depreciation solution. “The disappointing performance of net trade is another puzzling aspect of this downturn”, says the DG, speaking at the Official Monetary and Financial Institutions Forum in London this week. “there is a possibility the demand for, and supply of, exports have become less responsive to relative price signals, perhaps reflecting the nature of the goods and services in which we have a comparative advantage”.

Crikey Charlie, we stopped talking about comparative advantage once Ricardo had persuaded the good burghers of Lisbon to part with fortified wine in exchange for dodgy textiles from Lancashire. At least you didn’t mention the J curve. The Bank is beginning to get the message about which we have been writing for years.

Depreciation does little to improve net trade. Imports and export elasticities are demand dominant, with relative price, relatively inelastic, in the case of exports and almost inelastic with regard to imports, there is no substitution effect. The Old Lady is a slow learner. In the 80s the Bank models claimed interest rates had little impact on consumer spending, five years ago the model claimed low base rates would lead to a surge in investment. The Bank of England has a slow adaptive model, it may be DSGE but it is hardly dynamic and appears to be oblivious to shocks.

What happened to sterling?
Sterling rallied to 1.5198 from 1.5123 against the dollar but steadied against the euro at 1.1687 (1.1691). The Euro dollar closed at 1.2996 from 1.2932. On fundamentals the pound is fair value at 1.50 - 1.55 dollar but remains undervalued below 1.25 euro basis, the technicals are all for the present.

Oil Price Brent Crude closed at $100.39 from $102.64. The average price in May around $103 compared to $107 last year. June 2012 $95 is the number to beat! The best for inflation may be over.

Markets, it is pay the piper week. The Dow closed at 15,115 from 15,303. The FTSE closed at 6,583 from 6,654. Time to sell in May and go away we said mid May, we are off to Crete next week.

UK Ten year gilt yields increased to 2.03 from 1.91 - US gilt yields closed up 2.13 from 2.01. The great rotation has now begun. Markets are beginning to fret about QE cessation and exit. The financially repressed, obliged to buy gilts for now, will slow the return to market equilibrium in the medium term.

As for gold, closed at $1,387 from $1,392. The excitement is over for now, this is a hung chart.

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That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. The Saturday Economist.com is mobile friendly, no need for a special app any more!

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John

The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The receipt of this email should not be construed as the giving of investment advice. It's just for fun, what's not to like! Dr John Ashcroft is The Saturday Economist.

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