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03 October 2011


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Geoffrey Watson

I agree totally. But I am sceptical, about the political will!

Geoffrey Ashby FCA

A very good summary but reference to 'The Deficit' leaves a lot unsaid. There are two deficits - the accumulated and the annual Budget - all talk is of the Budget Deficit but it needs to be constantly stressed that unless and until there is a Surplus on the Budget the Accumulated Deficit will increase - personally, without big tax hikes or a reduction in our contribution to the EU, I cannot see the Accumulated Deficit reducing at all.
Commentators refer back to previous crises and how Budget Deficits turned round - forgetting that in those days we actually had a proper balanced Economy ie Free Trade doctrines had not destroyed our mass production.
Another inhibitor is the UK losing so much potential corporate tax due to increased scope for Group Relief and Companies able to move Head Offices to Switzerland and it's low tax regime.
A depressing outlook indeed.


UK banks set their own customer deposit rates. If their deposit rates are low it means they have no need for more deposits.

What the banks need are sound customers with sound projects and an economic environment that creates a tolerable level of risk against loan losses.

John Jolley

It would have been good for him to tell the population just how much we waste on the EU.I'm sure that money could be better used here in the UK.
That long-promised referendum can't come soon enough for me and hopefully the majority will vote us out of the EU.
The "Common Market" is still there,thats all we need ,not endless expensive meddling from Europe.

Terry Smith

To Geoffrey Watson

You are right of course. I was careful to say that I liked at least some of what George Osborne said especially the bit about not being able to borrow our way out of debt. But it is a truism that you shouldn't listen to what politicians say but watch what they do. And after 24 hours in Manchester, I despair.

Roger Sherrin

You are absolutely right about the government lending to business and a very good summery. I look at my shares today and weep.

james c

Terry, perhaps you could tell us how the entire economy can pay down debt. Of course individuals can do so, but collectively it is nigh impossible.

Terry Smith

To james c

Spend less. Save more.

Terry Smith

To Geoffrey Ashby

You are right, people are constantly confusing the deficit with the debt. The debt will indeed keep rising even if the deficit is reduced. I would suggest there is only one way which is within our control to correct this: spend a lot less.

Terry Smith

To Andrew

I agree. Low interest rates do restrict the supply of deposits-who wants to deposit money at 0.5% or less? The banks may set their own deposit rates but there isn't much incentive to bid up for deposits when there is also no loan demand because sensible businesses are too wary to borrow. Our politicians are of course bi-polar and/or have short memories. They claim that the crisis was caused by banks' lending recklessly (including securitisation) now they are imploring them to lend more and even thinking of stepping in and taking over lending themselves with so-called credit easing which will be disastrous.

Terry Smith

To John Jolley

I could not agree more. What do we get from the EU for the £40m we send them every day? I stood for Parliament for the Referendum Party in 1997. The EU has grown beyond the idea of a free or common market with the Common Agricultural Policy, and European Parliament and Court which can impose laws upon us and of course the common currency. All of these were the projects of European federalists who despise democracy. They also dislike the markets and demonise them as the source of our problems because the markets are one of the few things which can hold them to account for their actions.


Terry, I think your argument has to be tuned a little. Banks can never be short of deposits for lending because of the way the BOE has always acted in the money market. Providing the bank thinks the loan is good it can always get the deposits it needs. Generally speaking people do not hold cash outside of the banking system.
The issue you are really faced with is the BOE policy of theft of savers wealth via inflation, so that debtors are supported, and clearly that is part of government policy. I have a question though. Do you want to see pensioner and other wealth in the economy impacted by house price falls? Do you want to see deflation as a policy? How are you constructing an argument that higher interest rates will be good for the UK economy? Honestly the banks just do not need more deposits to create more loans. The bank lending issue is more about confidance in asset prices and the ability of firms to see a future that is worth investing in *and* loan affordability and other attractive loan conditions.

Terry Smith

To Andrew

I agree the bank lending problem may be primarily one of a lack of demand as borrowers are not confident that they can make an adequate return and neither are the banks. But whilst people may not hold much cash outside the banking system they can and do decide not to hold as much in cash when deposit rates are <0.5%. I do want to see house prices fall. In the long run that will be good for the UK economy. Pensioners are also adversely affected by low interest rates.


And as Mcmillan said "events dear boy events" because all has been surpassed by QEII.We truly are on the deck of the titanic now have moved the deckchairs around and finally we are at last listening to the band and OH MY GOD is that a fat lady I see aproaching.


If non-bank people do not hold much cash but have deposits at low interest rates, and want to use that money, then only if they buy investments from banks or repay bank debt would deposits fall. All other investments or purchases with non-banks would just create deposits for another organisation. Low interest rates tends to discourage debt repayment and is one policy reason to have low interest rates. So essentially the deposits are stuck in the system or are used to buy bank assets or repay bank debt.

It seems clear to me that BOE policy is to devalue savings where low interest rates and a higher inflation are a way to devalue debt, if wages rise, and housing prices, while remaining static or falling slightly will lead to greater real price adjustments eventually, without destroying the banking system. Of course we can say well why save the banking system when it can be nationalised?

Higher interest rates will instead lead to implosion in my view in the current dire circumstances. Some of the UK banks have such huge liabilities would the public want to be backstopping them? France for example seems to be in one hell of a situation right now.

At the end of the day some people do have money which they can chose to spend and invest. It might seem a good idea that for example light aircraft crash in price to enable bargain hunting but then manufacturers are not going to be making aircraft or cars and so forth as manufacturing economics change.

Pensioners who are short of money can be supported. Many pensioners have houses. Which pensioners are we to support?

So the nature of the debate is do we as a people prefer inflation or deflation?

Bank of Japan for example seems to have had a policy of restructuring the japanese economy via a backdoor undemocratic policy of forcing companies to adjust or go to the wall. Plenty of people have made that argument based on comments made by BOJ staff over the years.

From another point of view the world is overpopulated and therefore under resourced for that population. Deflation would be a great way to seriously reduce the world population and inflation might only delay that outcome anyway. But is that to happen in our life time? Nobody is likely to make those decisions unless it is forced upon them by WW3.

Terry Smith

To Kevin

You're right. The end game is in sight. John Redwood in his online diary just published a good piece about the latest £75bn of Quantitative Easing:


It's a tongue in cheek piece basically saying that it is such a brilliant idea to "print" £75bn of new money that he can't see why we don't go the whole hog and just print enough to pay off the whole national debt. Sometimes you have to think through such an extreme position in order to see the folly of what is being done. Movie sequels are rarely as good as the original: QE3 will have less effect in stimulating the economy that QE1 or QE2. But the more we keep borrowing and spending, the deeper the hole we will eventually have to dig our way out of.

Jo withers

'leave the weather forecasting to others'
Climate is not weather, climate is long term trends. It has been agreed by 99% of climatologists that global warming is man made. The few scientists who disagree are funded by people who have invested interests in fossil fuels.
Energy subsidies are not unique to renewables; fossil fuels and nuclear receive much more subsidies.
The available wind power in the UK can provide energy and jobs similar to north sea oil and gas and make britain an energy exporter, bring in income and bolster the economy.
People need to educate themselves about this.

Terry Smith

To Jo

Where does the 99% number come from, and doesn't wind power suffer from the disadvantage that you have to build conventional back-up power supply for a very significant proportion of the power it supplies for times when the wind doesn't blow such as anticyclones in winter? Today over London it's sunny and 10C with winds at 3km/h and variable direction. The two big wind turbines at Ford in Dagenham which I can see from my office are not turning so I presume the plant is drawing power from the grid which is being supplied by fossil fuels or nuclear.

Jo withers

Hi Terry,


Firstly wind-turbines in cities make no sense, the ones in Dagenham are not likely to run well.
Wind turbines rely on steady wind streams, the tops of hills and out at sea are perfect for this. Cities tend to cause lots of turbulence and hinder their performance.

Wind variablility is indeed a big issue. The cold spells of the last two years have been accompanied by low wind levels and have rightly provoked questions about how to make power in such situations.

However for the hundreds of GW that wind can provide when it is windy, this is a lot less fuel burnt during those periods. These windy spells are like sunny spells in Britain, easy to predict and lasting quite a while once they start, so we don't need to continue to startup and shut down back-up power stations.

Terry Smith

To Jo

I think you could have stopped that sentence earlier: wind turbines make no sense. I merely used the ones in Dagenham to illustrate the point as I could see them. They would not have been turning wherever they were sited in those weather conditions. Anticyclones in winter are generally associated with still conditions. The problem isn't just one of having to start up and shut down power stations, it is necessary to build roughly conventional generating capacity to back up all wind power which is terribly inefficient.

Jo withers

what do you mean by inefficient?

Jo withers

Hi Terry, thanks for your response.

You didn't say what you thought about the 99% of climate scientists opinions!

Wind turbine inefficiency is a common misunderstanding.

By efficiency we mean the amount of available energy compared to the amount of converted useable energy.

So with a coal power station this is about 30%, that is we convert 30% of the availabele energy in coal into electricity. This is important because that is a return on investment, the coal costs money so the less we convert the more money we waste.

With wind this is not so, wind is free so it doesn't matter how much we convert. Wind turbines are actually very efficient converting over 50% of the energy in wind into electricity.


Terry Smith

To Jo

You said 'It has been agreed by 99% of climatologists that global warming is man made'. Can you tell us all where to find confirmation of that assertion?

Jo withers

Hi Terry,

Yes, there are two links provided in my post of 28th October.

Ones an academic report stating "97–98% of the climate researchers most actively publishing in the
field support the tenets of ACC outlined by the Intergovernmental
Panel on Climate Change"

(ok not quite 99, but you get the point)

The others a survey of 10,257 earth scientists.

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