The lesser-spotted five pound note, and some other stuff
The Bank of England is trying to boost the number of £5 notes in circulation – their chief cashier Andrew Bailey (whose signature is on every new banknote) said “our evidence suggests that the public wants more £5 notes”. The general public are demanding more of the lowest denomination banknote? On our desk we have some Reserve Bank of Zimbabwe One Hundred Billion Dollar notes, and, from a trip less than a year later some One Hundred Trillion Dollar notes (100,000,000,000,000). In an inflationary environment, the public demands higher and higher denominations of banknote. In the UK we want the lowest possible denomination. This looks like a deflationary sign.
Yesterday the UK’s FSA came out with a Liquidity Calibration statement. We’d thought that the authorities might try to kill two birds with one stone, and force banks to hold more in quality, liquid assets – the banks would then be more liquid in case of market turbulence, and the government would find a new, big source of demand for its never ending supply of gilts. This statement has delayed that – “the FSA believes that it would be premature to increase liquidity requirements across the industry at the current time”. Given the weakness of the economic recovery, the FSA doesn’t want banks to be forced sellers of risky assets (including loans to the private sector) – but this is clearly bad news for the UK’s ability to find buyers for its gilt issuance.
Journalist Andrew Rawnsley put the boot into David Cameron in his Channel 4 Dispatches documentary last night, concluding that if the Conservative leader in opposition doesn’t have any real guiding principles now, he will struggle badly if elected to government. The public seem to feel this way too, and additionally undecided voters in vulnerable jobs (especially in the public sector) fear the threat of higher Tory cutbacks post the election. This explains the collapse in the Tory poll lead – down to something like 2-5%, with some polls showing Labour and the Conservatives neck and neck in even the marginals, despite non-dom Lord Ashcroft’s windfalls for Conservative candidates’ campaigns. So a hung parliament looks more and more likely. I’m not sure it would be the end of the world however; a coalition might find it easier to sort out the public finances, as it would have safety in numbers and not have to take sole responsibility for a period of high unemployment and cuts to public services. Also, past examples of coalitions have not necessarily been disastrous – the UK’s greatest moment of national crisis, World War 2, was fought under a coalition government. A paper from the Hansard Society looks at the history of such coalitions, and concludes that a hung parliament might be a great opportunity. “Parliament would be strengthened because parliamentary votes would be less predictable and therefore crucial”. Buy the pound and sterling assets whatever the election result is?
If you thought Greece was bad, have you seen California lately? It’s a good comparison, because both are credit-challenged nations within a single currency area. At least Greece is not terribly systemic at 2% of EU GDP, whereas California is 14% of the US economy (France is 16% of EU GDP). Too big to fail? California was badly hit by the crash in subprime housing, and tax revenues have fallen sharply. S&P just downgraded its debt to A- (Moody’s is at Baa1) and its 5 year CDS trades at 250 bps versus Greece at 280 bps, and the US as a whole at 35 bps. Things have got so bad for California that it started to print its own currency last year – in July it issued IOUs to individuals and businesses who were owed tax refunds. Effectively it is trying to bypass the single currency area, by issuing parallel money – but one dollar of Californian IOU is not worth a proper dollar in any free market. Especially if you call them “revenue anticipation notes” – come on, at least a doubloon or groat would sound like proper pretend money? Some crunch dates coming up for the Californian budget – sovereign worries in Europe have faded a little in the last week or so, might the spotlight head to the US next?
And finally, a great article about Come Dine With Me, the TV competition where amateurs take it in turn to cook for each other and then are rated by their fellow competitors to try to win £1000. Economists spend a lot of time and money trying to create experiments like this (OK they just bribe some undergrads with a couple of those rare UK blue fivers). Come Dine With Me provides a closed environment where you can see that the rational economic man, beloved of all economic models, does not exist. The rational score to give your rivals is zero – that never happens. Read the article for that, and other micro-economic insights (“Regret – if Rachel had known how big an arse Stuart was she would not have scored him so highly”).
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
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