Once again, August in Europe means little to report from there. This is not to say that nothing has happened, since Greek premier Antonis Samaras has been travelling around the continent’s capitals with begging bowl in hand, but we shall not know his degree of success for a while. Probably not a very long while, though, given the pressing need of several members of the eurozone to meet their coming financing deadlines.
Last week, we were going to mention some extraordinary comments attributed to Michael Saunders, the UK economist at “Citi”, which appears to be the latest name by which Citibank, or perhaps Citigroup, wishes to be known. They’ll have to do better than that if they really want to hide their origins. Anyway, his brilliant idea was that UK finance minister George Osborne, rather than merely rejoicing in the paper profits made by his loyal servant Mervyn King in manipulating the local market in government bonds, should take the logical next step and spend these winnings. This seemed so extraordinary that we felt compelled to check that it was not a hoax – which would, in fact, have been quite funny – but no, we can confirm that he really did say this. Given Mr Saunders’ elevated station in the financial community, it is worth devoting a few minutes thought to making sure that the concept really is as obviously daft as it sounds.
To begin, we must ask ourselves how the Monetary Policy Committee has produced these wondrous profits. Easy, they have spent £325bn, with another £50bn coming soon, buying up more than a third of the outstanding issue of the gilt market, causing, guess what, a rise in the price level all along the curve. Of course, they haven’t paid for these investments with real money, but with the newly created currency which it is their prerogative to print. They crow about the UK’s ability to borrow in the markets at historically low rates, and present this as evidence of foreign investors’ faith in the future of the British economy, but the truth is that there are no such investors, with the buying coming partly from a bunch of momentum based funds, but mostly from the nation’s own population, who are forced by pensions regulation to watch their savings being funnelled into this overpriced market and, of course, by the Bank itself.
So far, this is an old and well known story, though no less outrageous for that. Citi’s suggested augmentation is that the unrealised gains should be spent as if they were real income, and it becomes less surprising when we recall that they are one of the banks whose proprietary traders have for years operated in precisely this way. Their habit is to put on a big position, manipulate the price or simply mark it higher, take the winnings straight to their p&l and bonus themselves accordingly. It works really well for them, so why not for a country? Citi’s long suffering shareholders, who have failed to benefit much over the decades even as the bank and its predecessors have been handed numerous and massive government bailouts, might offer an opinion but, like the electorate in whose name the central bank is supposed to operate, they will not be asked. However, we feel that the comparison with the behaviour of the investment banking community says all that is required.
We cannot help wondering what view Willem Buiter, Citigroup’s chief economist since 2010 ( and therefore Mr Saunders’ boss? ) takes of this. His impressive CV includes a three year stint on the MPC, and he is one of a number of vocal and articulate alumni of that institution who regularly point out the inadequacies of its policies – what is it about being a serving member that nowadays seems to bring about a jellification of the brain? Famously, only nine months before taking his present job, Buiter described his future employers as “a conglomeration of worst practice from across the financial spectrum”, so this is a man capable of saying what he thinks. Willem, if you’re reading this, please feel free to post a comment.
Perhaps the Governor was impressed with Mr Saunders’ suggestion, for last week Mr King seized upon a research document produced by his bank to make the extraordinary claim that his activities in the printing room, perceived by most savers and pensioners as a deliberate and cynical policy designed to impoverish them, have in fact caused enrichment to the tune of an average of £10,000 per head. The logic is that by distorting financial markets to the point that the return offered on any investment that a pensioner can responsibly hold is close to zero, the present value of a fixed income has gone through the roof. This, apparently, should make everyone feel rich and happy, overlooking the fact that the price inflation which QE is building up in the system is only a matter of timing, and will in due course destroy their ability to meet their basic expenses. The man or woman in the street does not have an economics doctorate, but they know enough to grasp this. It takes an MPC member to miss the point, and its chairman to be proud of the fact.