Why can’t the BBC tell us what’s really happening?

By Neil Patrick

The Bank of England:
 Remembered where the UP button was yesterday

In my opinion, yesterday was the best news day in the UK since I started this blog. Yet anyone watching or reading the UK mainstream news could be forgiven for assuming quite the opposite.

I'm referring to the news that the Bank of England is raising interest rates for the first time in over 10 years.

The simple and obvious impact of this is that if you are a saver, this is minor good news. If you are a borrower, it’s not. Yet reality is seldom this binary and most people both save and borrow albeit in varying proportions.

So the BBC TV News thought it would be appropriate to ask two types of people what they thought. One who was struggling with a low income, a mortgage and the costs of a young family. The other a retired bloke who relied on his savings income. Naturally enough, they gave totally predictable answers. The saver that it would make little difference to his income and the borrower that any extra costs would be hard for them to bear.

I guess this is the result of the BBC striving to be inclusive; less London centric and eliteist. But it turned much better news than any sports victory, royal wedding or Oscar win, into the overall message that whether you’re a borrower or a saver, there's little to celebrate.

The Guardian’s headline followed a similar vein – ‘More costly mortgages in wake of rates rise’. Buried in this piece was the fact that this amounts to a £22 a month increase on average for homeowners with mortgages. It didn’t mention that those on the lowest incomes will have smaller mortgages and so their increase will typically be much less.

I’m not saying that this isn’t tough for those on the lowest incomes. But this news is a minor revelation. It represents a tentative first step back towards normality from which all will ultimately benefit. This is the real story, but it’s just not reported that way.

The increase was just 25 basis points (0.25%), taking the base rate from its all-time low of 0.25% to 0.5%. This isn’t a hike, it’s a tiny increase. I am old enough to remember when base rates reached 17% and a 1.00% move in either direction barely merited a mention. Yet the BBC described this news as ‘interest rates will be doubled’. Technically correct, but also completely misleading to anyone who doesn’t watch these things closely.

Mark Carney, the Canadian Governor of the Bank of England has proven to be a shrewd judge of when to intervene with rate changes. With inflation at around 3%, high levels of employment (despite poor wage growth) and growing consumer debt, a rate increase has been on the cards for months now.

As central bankers repeat ad nauseum, base rates are a blunt instrument, but they are also an immediate way to cool things down, especially inflation. Carney described it as ‘easing off the gas a little’. In other words, moving further away from the quantitative easing panic button which was pressed repeatedly in 2008 to retain liquidity in the wake of the collapse.

It is also an experiment to see how things react. The FTSE 100 surged:

The pound fell a couple of cents against the US dollar. This is not a catastrophe – it’s a fairly normal adjustment. And it’s part of why a free-floating domestic currency is so helpful in keeping an economy under control. The Greeks would chop off a finger I reckon to have that option.

I predict further small rises leading up to the Article 50 deadline on 29 March 2019, unless there is some drastic reaction which persuades against this path. Carney wants to ensure that whatever form Brexit finally assumes, when it happens, he has the scope to move rates accordingly to keep the UK ship stable.

Forget what the Westminster monkeys on both sides are saying about Brexit. The Bank of England is doing a fine job of preparing us for any scenario. And bear in mind that the BBC and the mainstream press have long forgotten how to tell us the things we really need to know.

Shock as Mark Carney spills the beans (and agrees with me)

By Neil Patrick

Bank of England Governor Mark Carney
Photo credit: World Economic Forum 

What is front page news today in the UK? Well it’s that the Governor of the Bank of England agrees with me about the jobs crisis.

Mr. Mark Carney’s speech last night in Liverpool was the first time I have ever seen one of the world’s most senior central bankers endorse the very things I have been banging on about here for the last four years.

But I am not gloating. There can be no joy in the confirmation that one’s worst fears are indeed reality. What’s tragic is that this demonstrates just how long institutions take to acknowledge that a problem exists. Let alone do anything about it.

And the Bank of England is falling back on its get out of jail free card to pass responsibility for solving the problem to the government. After all, monetary policy is a blunt instrument, as central bankers are always swift to remind us.

Anyway for fun (if such a thing is possible) on hearing this not so new ‘news’, I have taken a look at his main points and compared them to things I have said here, and when I said them.

The Daily Mail’s front page headline today read:

On 15 Sept 2015, I wrote:

“The endless rise of tech is one of what I call the “six pillars of job destruction”. The others are globalization, demographics, monetary and fiscal policy, educational lag and digital communications… “

The front page story by Hugo Duncan in the Mail went on:

‘In an alarming vision for workers, Mark Carney warned many jobs would be 'hollowed out' as huge technological advances meant roles could be automated instead.

‘The Bank has said the march of the machines in the workplace puts administrative, clerical and production staff most under threat.

On December 1 2014, I wrote:

“Whilst the whole of a job may be currently impossible for a machine to replicate, parts of that job may well be perfectly capable of being replaced or aided by technology. This fact in turn means that fewer people are needed to deliver the same amount of work.”

‘The Bank of England predicts that entire professions, such as accountancy, could be pushed to the brink of extinction as developments in computers make their roles redundant.

On 27 July 2016, I wrote in reference to the endless rise of tech:

“In the US and Europe in particular, this is why the middle class is becoming an endangered species”.

‘Mr Carney claimed that 'up to 15million of the current jobs in Britain' – almost half of the 31.8million workforce – could be replaced by robots over the coming years as livelihoods were 'mercilessly destroyed' by the technological revolution.

And in July this year I said:

“The last remaining argument for tolerance of the jobs carnage created by the tech tsunami is that the Wikipedia version of history tells us technological progress is inevitable, and has only ever resulted in greater wealth and a better society. But this assertion doesn’t bear much scrutiny if you have even a basic knowledge of economic history.”

Mark Carney again: 'The fundamental challenge is, alongside its great benefits, every technological revolution mercilessly destroys jobs and livelihoods – and therefore identities – well before the new ones emerge.

I said in 2014: 

“The jobs created by tech are totally different to the ones destroyed by it. Which means those who lose their jobs as a result of technology are largely unable to switch.”

Carney: 'This was true of the eclipse of agriculture and cottage industry by the industrial revolution, the displacement of manufacturing by the service economy, and now the hollowing out of many of those middle-class services jobs.'

In October this year I wrote:

  “We have to understand how technology is going to impact our area of professionalism and get ahead of the change curve”

‘Speaking at Liverpool John Moores University yesterday, the Governor also claimed workers had suffered '…the first lost decade since the 1860s', with living standards suffering the biggest squeeze since Dickensian times. Calling for the Government to tackle 'staggering wealth inequalities' through redistribution, he said: 'Real wages are below where they were a decade ago – something that no one alive today has experienced before.'’

‘Globally, the share of wealth held by the richest 1 per cent rose from a third in 2000 to half by 2010. In the UK, the income share of the top 1 per cent tripled from 5 per cent in the early 1980s to 15 per cent in 2009.

In September 2014 I reported how: 

“quantitative easing policies have benefited mainly the wealthy. About 40% of those gains went to the richest 5% of British households...exacerbating already extreme income inequality and the consequent social tensions that arise from it”.

‘Mark Carney went on to say: ”…globalisation has seen 'the superstars and the lucky' thrive while others have struggled. ..Now may be the time of the famous or fortunate, but what of the frustrated and frightened?”

On 8 April 2015 I wrote: 

“…the globalization of workforces means that many jobs which used to stay firmly in the domestic market are now spreading around the world. And it’s not just a cheap labor argument. I recently had lunch with an entrepreneur friend who told me that almost his entire workforce was now composed of freelancers based the Philippines. Yes it was cheaper than a UK workforce (by about 75%), but critically this wasn’t his main reason for the choice. He was in the business of web content production and he had found that his overseas workers were more diligent, more proactive and had better written English than the people he used to employ in the UK.”

And in January this year I wrote that:

“There will be many more super rich in the world, but also a great many more who used to be comfortable, becoming very uncomfortable.”

Carney again: “One of the things that I think contributes very understandably to the level of anxiety that households feel in this economy, in other economies, is the fact that it has for them been almost a lost decade of growth.”

On 15 November 2015 I said:

 “…persistent slow growth will continue to dampen employment prospects…real wages have stagnated across many advanced G-20 nations and even fallen in some.”

Carney: 'Real incomes in this country have not grown for the last ten years. That is incredible and that shines a light on inequalities that exist in this economy and make people question what is being done to address those and what are the fundamental causes of those.'

He added: 'For free trade to benefit all requires some redistribution. We need to move towards more inclusive growth where everyone has a stake in globalisation.'

For the first and I hope not the last time, I applaud Mark Carney for not mincing his words and spelling things out to the government. Even if he is a bit late in diagnosing the problems.

We need change and we need it fast.

The destruction and degradation of jobs is something I’ve been documenting here since 2012. Now four years later, we have an acknowledgement of the problem from someone who has the influence to do something about it. But we cannot wait another four years for practical solutions to begin to be implemented.

The machines aren’t going to wait and neither can we.

Why the economy will never be the same again

By Neil Patrick

As we slowly struggle out of recession, it's tempting to hope that the problems it caused will soon fade. But there are clues that things will not and cannot ever return to how they were. In fact the evidence is all around us; static or falling growth in real incomes despite bouyant stock markets, larger and larger wealth inequality, the ongoing injection of liquidity into economies through QE. And biggest of all, the mountain of government debts around the world. 

The real story of the 2008 financial collapse and subsequent recession isn’t about greedy bankers, dozing regulators or complacent politicians although they all played their part. It’s a story which is bigger than all of them put together. It’s a story about the transition of the whole developed world from one economic era to an entirely new one.

It’s tempting to think that all our financial woes were created by 2008 and its aftermath. And yes, it’s true that we’ve been going through possibly the worst recession in history. But the financial crisis wasn’t the cause of this, it was a symptom of a much bigger global problem and transformation which has been underway for decades. 

And it’s only if we understand the nature of this transformation that we can figure out what each of us will have to do in the coming years to ensure that we don’t become victims. Many of us have suffered enough already from the economic collapse. But the collapse wasn’t a singular event. It was a symptom of the failure of a monetary system which has passed it use by date. The aftershocks will be just as painful to many more of us. Possibly even more, if we don’t individually figure out our own survival plan now.

But I’m getting ahead. We first need to look at what’s been going on and why.

Who is really to blame for the recession?

It’s tempting to adopt over simplistic knee-jerk explanations. People were too greedy. Lenders were too careless. Big bonuses encouraged unethical and even illegal practices. Politicians were self-serving and in league with big business. There is plenty of evidence of all these things of course, but they don’t lie at the root of the problem. They were symptoms of much more fundamental changes in the world.

The real culprits are in the shadows, or at least so low profile and mysterious to most that they attract very little attention from the general public. They are the central banks. The borrowing spree was made possible because the central banks allowed it to become possible. The money banks were lending was only available to lend in the first place because of central banks’ rules around what bankers call fractional reserves. And without over-lax fractional reserve rules, there could have been no explosion in lending and no financial crisis. Whilst much of this story is complex, this is one aspect that is really simple.

How central banks made it all possible

Central banks like the Federal Reserve and the Bank of England, require a bank to keep a reserve of capital that is in direct proportion to the amount it has lent. So let’s say the central bank imposes a fractional reserve requirement of 10%, if a bank has £100 million of deposits, they cannot lend more than a total of £900 million. The questionable idea behind this policy is that banks are responsible and prudent institutions and no event could ever undermine depositor confidence so much that everyone wishes to withdraw all their money at the same time, thereby bankrupting the bank(s).

It seems like a crazy notion when we remember that there have been plenty of bank runs throughout history. For the record these include, the Dutch Tulip manias (1634–1637), the British South Sea Bubble (1717–1719), the French Mississippi Company (1717–1720), the post-Napoleonic depression (1815–1830) and the Great Depression (1929–1939).

With hindsight today, it seems incredible that the idea of fractional reserves could persist, but it did and it still does…the fractional reserve system hasn’t been dropped. It’s merely been tweaked round the edges with requirements for slightly higher capital reserves and greater risk mitigation. The main driver of this is the Basel Accords I, II and III which have sought to apply progressively increased solvency and capital reserve requirements on banks.

The system is still viewed by governments and central banks as a reasonable means to support their economies by enabling businesses to borrow money to grow and consumers to spend. Oh and governments can easily borrow too, so their own financial position is never under too much pressure. When they need to, they can simply borrow more money…

Governments are incentivised to spend not save

Western democracy encourages politicians to make voters happy. So they can get re-elected and stay in power. But you don’t get popular by spending responsibly. You get popular by building more schools, providing better healthcare, cutting taxes, creating more policemen to keep us safe from the bad people….the list goes on and on.

There’s one slight problem though. How can a government afford to do this? Especially if the economy isn’t doing too well. Someone has to foot the bill. And that’s where the central banks become super useful to governments. Central bankers are not stupid. They are not simply going to hand over billions to governments just because they are asked. No, they demand in exchange a promise from the government that the money is in the form of a loan. The central bank issues a bill for the loan amount to the government. And in return, the government gives the bank a promise to pay the bank from its future income. It’s called a bond. Through the use of bonds, the government is mortgaging the future wealth of the nation – i.e. the future work and earnings of its population to pay for its spending today.

But governments are not just mortgaging our future work, they’re making the rich richer in the process

And then there’s quantitative easing (QE). In order to prop up the economy in times of extreme stress, like now, central banks print more money to maintain liquidity. Or in other words to keep everything limping along in the economy. In the US and UK this has been carried out by the Federal Reserve and the Bank of England. It’s a medicine with severe and nasty side effects though.

In August 2012, the Bank of England issued a report stating that its quantitative easing policies had benefited mainly the wealthy. The report said that the QE program had boosted the value of stocks and bonds by 26%, or about $970 billion. About 40% of those gains went to the richest 5% of British households. Dhaval Joshi of BCA Research wrote that "QE cash ends up overwhelmingly in profits, thereby exacerbating already extreme income inequality and the consequent social tensions that arise from it".

Economist Anthony Randazzo of the Reason Foundation wrote that QE "is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality".

In May 2013, Federal Reserve Bank of Dallas President Richard Fisher said that cheap money has made rich people richer, but has not done quite as much for working Americans. Most of the financial assets in America are owned by the wealthiest 5% of Americans. According to Fed data, the top 5% own 60% of the nation's individually held financial assets. They own 82% of individually held stocks and over 90% of individually held bonds.

As the majority of people get poorer, so they are less able and less inclined to borrow money. And this is exactly what we see happening. In the UK, government debt has risen exponentially in the wake of 2008 whilst private debt has been falling:

The system makes it much easier for governments to borrow than save

To say “bond bingeing” has become a bad habit is an understatement. In the US today, government borrowing has become a debt crisis. In Between September 30 and October 17, 2013, much of the US government infrastructure was forced into shutdown due to inability of Congress to agree about how the costs of Obamacare could be met.

You’d expect in a financial crisis that a responsible government would look for every way possible to reduce spending. And yes, they attempt this. But not very successfully. Every proposal to reduce spending prompts a counter argument that it’s unfair, unpopular, impossible, or will lead to extra costs elsewhere. And this is where our governments fail us. Unlike businesses which will act fast and ruthlessly slash costs, doing whatever they can to remain solvent, governments are huge unwieldy bureaucracies and every cost cutting proposal becomes bogged down in debate, argument and ultimately delay and compromise.

Meanwhile US government debt is in crisis as it continues to soar out of control. But unlike every recession before, when government spending reduced or slowed, in the wake of the 2008 crisis, the opposite happened and it took off like a rocket:

Total US public debt in 2013 was $17.6 trillion. That’s $36,653 for every man, woman and child in the USA today. It’s 31.3% of all the debt in the world and has overtaken GDP in the US.

But other western economies are not far behind. In the UK, government debt per person is $32,553. In Germany, it is $31,945. France is $31,915 and Italy $37,956. In the most struggling western economies, the situation is even worse. Greek debt per person is $40,486, a staggering 161% of GDP.

But the worst is behind us now…isn’t it?

This wouldn’t be so frightening if western economies were showing improving domestic incomes and earnings. But this isn’t happening. In fact the reverse has been happening for over 40 years.

Despite rising productivity, in the US, real household income has hardly grown at all since 1970!:

What we see here is critical. The vital connection between GDP and household income has broken. Permanently. And this reality has nothing to do with the financial collapse and the recession. It’s been staring us in the face for forty years or more. As technology continues to accelerate productivity, relentlessly reducing production costs and thereby lessening the need for human labor, there is absolutely no reason to believe that future GDP growth will result in increased household incomes.

This situation has little or nothing to do with party politics. It’s not about left vs. right or capitalism vs. communism. It’s to do with global economic and monetary systems, energy, technology, communications and society’s expectations.

And in the west, the expectations of what the system can and should deliver have completely outstripped its abilities to meet those expectations.

UK: Why falling unemployment numbers are a mirage

By Neil Patrick

Well, it’s Saturday again. On this day every week, I tend to draw breath after the week’s activities, fill myself with coffee and reflect on the week’s news and developments.

Naturally enough, employment news is high on my list of topics to digest. And today is no different. Except that today, I have good news to report…well sort of.

In the UK, we are being told that we’re experiencing falling unemployment and that this is a sign of an improving economy.

Unemployment peaked at around 8.5% at the end of 2011 going into 2012. It’s now around 7.7% based on the current 3 month rolling average, or just 7.1% if you look at the latest monthly figure. So it’s showing a steady fall, perhaps even speeding towards the ‘target’ of 7.0%.

Why do I say that 7.0% is a target? Because that, said new Bank of England governor, Mark Carney, in his ‘forward guidance’ in August, is the level at which the BoE will start to increase interest rates.

Merryn Somerset-Webb, Editor in Chief of MoneyWeek described this as, ‘A dim-witted policy based on a number no-one understands’. Quite.

Carney also said he expected the UK to reach this position sometime around 2016! So we are doing great - we’re already miles ahead of where the Bank of England thought we’d be. Erm…not quite.

This figure of 7% is not some sort of magical threshold at which suddenly the recession becomes history and we all return to some sort of financial nirvana. Far from it.

If the current trend continues, we’ll be at 7% sometime around the middle of 2014. And fully unprepared to bear the even greater cost of living increases this will bring, on top of the ones which have crushed most people’s spending power over the last five years.

But as I have talked about elsewhere on this blog, raw unemployment numbers do not tell the story of what is really happening. And achieving the figure of 7% means absolutely nothing.

We know that huge numbers of people - around two million - are currently under-employed, i.e. they are working, but not earning as much as they need or want to. But they are not unemployed as such, so they are not counted.

Many more have simply given up looking for work and disappeared off the radar all together. These are not counted either.

Meanwhile, hundreds of thousands of young people have decided to avoid leaving the ‘womb’ and have stayed within the education system, hoping that during their delay, the job market will improve and give them the win-win of higher qualifications and an improved jobs market. Yep you guessed it - another artificial diminution of the unemployment total.

Just about everyone who could afford to take and has been lucky enough to be offered any sort of early retirement package (senior public sector executives for the most part – no comment) has understandably jumped at the chance. So off they go too!

Once we factor in these aspects, you can see why the raw unemployment number is virtually meaningless as an indicator of the financial well-being of the nation.

Which would be okay if it were not being used by the BoE as a barometer to judge when we are all able to afford higher interest rates on our mortgages and higher inflation in the already massively overinflated and over-taxed costs of essentials like power, transport and food.

Meanwhile, these figures have caused a good deal of self-congratulation in government circles. The government knows just as well as you and I that these numbers are an illusion. But they are gambling on the belief that most of the electorate won’t spot the ruse.

And I fear their assessment about this may well be correct. Most people I think will not be interested in looking behind the numbers to see what is really happening and this blind spot will mean that many will be more inclined to accept the idea that the economy really is improving.

I’m sorry to say it’s just not true. It’s simply more lies and corrupted statistics.

The Fed keeps the insane party going and why this is bad news for (nearly) all of us

By Neil Patrick

Investors have been stressing since the spring about the autumn prospect of Ben Bernanke printing just a few dollars less than before. Whole economies, like India, have wobbled before the threat that the Fed might print ‘just’ $75bn a month instead of $85bn.

And just as they were getting used to the idea, he goes and bails out at the last minute. This astonished almost everyone.What is going on?

Is this what Bernanke wants to leave behind?

I don’t wish to sound smug, but I wasn't as surprised as some people by this latest Fed stunt.

Why? Well primarily because the U.S. economy remains so weak that there are serious risks in actually initiating this move. Of course, the time must come when the Fed will begin to reduce its dollar printing. It seemed fair to assume that with all the advance warnings, the markets had already priced it in. And so I suspected the Fed might be much less aggressive than almost everyone anticipated.

But you can easily argue that the financial markets have become so accustomed to the Fed’s easy money policy that the quantitative easing (QE) addiction is now seriously ingrained. In other words, the stock market has consumed so much booze that the hangover will be so severe that it’s really preferable (not to say easier) to stay drunk.

However, I did think they would at least do something. After all, the market has been given so long to get used to this idea.

If the Fed actually ever intends to stop printing money, now looked a good time to make at least a small gesture in that direction. Even a 'tiny' reduction of $5bn would not have upset the markets too much, and would start getting them used to a slightly more sober environment with just a little less QE.

But no. Even with US stock markets at a record high, $5bn was too much for Bernanke. The Fed will keep printing $85bn a month…for now. And there’s no obvious prospect of this changing before the end of the year.

Markets were both stunned and cheered. Hurrah…even more free money! Gold soared. Emerging markets jumped, developed markets too. Pretty much everything jumped except the US dollar.

The Fed provided a few excuses for its inaction. It doesn't like the fact that bond yields have jumped so quickly in recent months. It’s worried about the impact of this on the housing recovery. And there’s also the threat of another big crisis over government spending, as the debt ceiling hovers ever closer.

As Paul Ashworth of Capital Economics pointed out, the Fed is probably “also increasingly concerned… that Congress could trigger a Federal shutdown within the next month.”

But if Ben’s really worried about the politicians not getting their fingers out to try and agree on something, then he should take away the security blanket of less QE. As Heidi Moore noted yesterday, he should “force the economy, the markets and Congress to think for themselves.”

So it’s all a load of shabby excuses. If this proves anything, it’s that Ben Bernanke doesn’t want to be remembered as the man who pulled the plug on the recovery too early, plunging the US into the Great Depression of the 2010s.

I guess he’d rather risk being remembered as the guy who acted too late to prevent the Hyperinflationary Collapse of the 2020s…

So what can we expect to see now?

It seems reasonable to assume from this that when it eventually happens, the actual process of tapering will be slow and gradual with the goal of minimizing any potential market disruptions.

But this is exactly where the difficulty lies. After all, everyone knows that the Fed cannot continue expanding the money supply at the current rate. Therefore, the challenge is how to taper with the least amount of market disruption.

I suspect this will include an increase in market ‘signals’ from the Fed to gauge the market’s reaction to various possible Fed actions and having contingency plans in place to try to control any unforeseen reactions and consequences which arise.

Tapering will mean higher interest rates

Most believe that tapering will result in an increase in interest rates, especially at the higher risk end of the market (like your mortgage, especially if it’s large or your earnings and credit history are anything less than dazzling). So, in this scenario, the housing market recovery could be stopped dead in its tracks.

Some claim that the delay on the part of the Fed may be politically motivated as it helps the Democrats by keeping interest rates low. Only a few people actually know the truth. The rest of us are left to speculate.

So, if the Fed does eventually get around to tapering, interest rates rise, the housing market recovery stalls, and the federal government deficit and debt spike, at election time, the Republicans will surely have all fingers pointed at the Democrats.

However, since the Republicans couldn't pull off victory in the last presidential election when the unemployment rate was at 8.2%, and given that Obama was the first incumbent in the modern era to be re-elected when the unemployment rate was above 8.0%, I’m not convinced that the Republicans would automatically benefit.

But the fact remains that higher interest rates will hurt everyone. Everyone that is except investors who rely on interest income.


So what does all this mean for most of us?

Even when the Fed does eventually begin to taper, I think they will remain “highly accommodative.” In other words, they will not raise short-term interest rates sharply for quite some time. Recently, when the Fed merely hinted that they might begin to taper, stocks sold off sharply.

So when will the Fed begin to taper? Some say December, but that’s during the holiday season, a period when the economy typically sees a brief uplift. This seasonality makes it difficult to determine if the economy is really healing or just experiencing a Christmas boost. Therefore, even though it’s possible the Fed will taper later this year, I don’t believe they will until at least 2014.

Despite the fact that many U.S. stock markets are reaching record highs, investors need to have a plan in place to protect themselves against a very possible and very nasty collapse. We are a long way from being out of the woods yet. In the interim, with GDP under 2.0%, stock values are continuing with their unwarranted inflation and I think the prospect of a severe correction in equity values just keeps on getting more and more frightening.

So investors need to keep a sharp eye on their assets and protect them against the very real threat of a severe market correction. Keep in mind that at some point, the Fed must take away the punch bowl, the party will end, and the probability of a collapse in not just stock values but other asset classes too is high. Really high.



What does this mean for investments, jobs and your financial future?

If you are an investor, hold your course. If you were happy with what you were doing before the 'vapor taper', you’ll be fairly pleased this week – almost everything you own has gone up in value (for now). Cheap Eurozone stocks still look good, Japan is still doing the business, and if you still have any, you should hang on to gold, specifically as a hedge against the real risk of systemic collapse which hasn't retreated from view.

But I wouldn't expect an easy ride in the coming months. Once the delusional euphoria of ‘QE forever’ wears off, there are going to be a lot of confused investors in the markets. As Eric Green at TD Securities told the FT: “The Fed had the market precisely where it needed to be.” This delay ” “ultimately makes that first step in the tapering process harder to achieve.(My emphasis)

It also puts a lot of pressure on Mark Carney at the Bank of England. On the one hand, Mr Carney will be pleased. The Fed’s 'vapor taper' might take some of the pressure off global interest rates in the short term. On the other hand, the slump in the dollar has pushed sterling higher. Carney won’t be too happy about that.

Anyway, what does this all mean for the outlook for most of us? Not investors with big investment portfolios but people with normal jobs and normal financial commitments. You probably know what I’m going to say.

The impact of this for business and hence jobs is hardly encouraging. The outlook for federal sector employment remains bleak and only confident growth in the private sector can offset this. But whilst share prices continue to inflate, significant GDP growth and business confidence remain elusive. So while growth in earnings remains subdued, employers will remain cautious about increasing workforce overheads.

We are likely to see a continued expansion of all the things employees dread like short term contracts, outsourcing, cut backs on management and support teams, in other words, growth in low paid, short term jobs, but contraction of secure, well paid jobs.

So we can all expect our basic costs of living to keep on rising at a scary rate amidst a really tough job market. And as I've talked about previously, slashing our outgoings, reducing our borrowings and increasing our income level through the acquisition of income generating assets is now more important than ever.

The crazy Fed party will end soon hopefully with a whimper not a bang.

What Mark Carney should be telling you about your career plans

By Neil Patrick

Unless you are particularly interested in the financial markets or economics (as I am) you probably didn’t pay too much attention to the news that the Mervyn King shaped hole at the head of the Bank of England had been filled (partially at least) by Canadian Mark Carney.

Mr Carney has a very good record we are told, having steered Canada’s economy skilfully around the economic crisis that swamped the US, UK and the Eurozone from 2008 onwards.

He’s wasted no time either in putting his stamp on the way the Bank of England conducts itself, and the first of his measures is the announcement that from now on the Bank will issue what he calls ‘forward guidance’ on its plans for interest rates.

Carney used the same ‘trick’ in Canada. On the face of it, it’s no bad thing; it allows businesses and markets to get a greater level of confidence over the medium term environment and consequently plan better and have fewer short term shocks to cope with. So in principle, I think this is a good thing.

But in practice, right now in this climate, it’s quite another. That’s because he’ll almost certainly be telling us all to expect near-zero interest rates for many years to come.

What he should be saying is that interest rates will have to rise one day, that the government is too deep in debt to keep most of its promises and that as soon as the cheap debt disappears i.e. as soon as any sort of economic recovery starts to happen, real wages will not rise for years.

So was Mr Carney really the saviour of Canada whilst the rest of the west fell into recession? The Bank of Canada first used the forward guidance idea in 2009. Carney slashed interest rates promptly but also pledged to Canadians that this low rate environment would remain in place for a long time to come.

The policy was credited with helping Canada steer its way around the recession and paved the way both for the creation of Carney’s reputation as one of the world’s cleverest central bankers and ultimately him getting the transfer deal from Ottawa to London.

But I suspect that the true value of Mr Carney’s measures have been massively over-hyped. The reality I think was that Canada’s salvation was as much due to the innate conservatism of its banks, high commodity prices and the fact that Canadians carried on happily spending and borrowing, as it was by anything that the central bank said.

To put it another way, are we really sure we are comparing apples with apples here?

So whilst I think this question remains open to debate, I am quite definite that this forward guidance obscures the emergence of a really dangerous situation for most working professionals.

Let’s not forget that 0.5% interest rates are an aberration. They have not been this low for the last 300 years. At some point in the future they MUST rise again. So if you’ve become used to paying your mortgage or business loan or whatever at today's rates, try doubling or trebling that monthly cost and ask yourself how comfortable you’d be in that situation?

If the answer is 'not very', you need to start doing something about it right now.

Next, let’s not forget either that the Bank England does not control the prices that you pay for the financial products and services you buy. UK banks have had a hard time as we all know, and whilst you may smugly argue that they got what they deserved, the fact remains that they will be using every trick they can muster in the coming years to generate profits again. The demise of free banking is already on the horizon and you can fully expect that as central bank base rates rise, customer prices will rise at least as fast and probably faster.

The next point is that as we all know, the UK government is in a state of near cataclysmic debt. It has the biggest deficit of any country in the developed world and simply cannot expect to continue without huge future reductions in spending. And as you’ve probably guessed, this means you can expect to see the costs of pensions, education and healthcare increasingly passed on directly or indirectly to you.

Last but not least, the growth of the last two decades in the UK was based mainly upon debt and house price growth which meant almost everyone felt they were getting richer. We weren’t, it was an illusion and only the ongoing supply shortage and of course the latest government house buying subsidy madness is keeping house prices from collapsing to their true value.

Only one thing really creates real wealth growth and that is rising productivity, and whilst some recent reports point out that this has increased slightly in recent months, it’s a far cry from being any sort of major turnaround. So, without the artificial stimulus of rising debt, real wages are unlikely to rise any time soon and may even continue to fall.

Couple this with the outlook for living costs I’ve outlined above and you can see that if you want to see any sort of improvement in your standard of living, or even just maintaining the one you have now, you’ll need to have a plan to earn a great deal more money over the coming years.

Of course no-one in the government or the Bank of England wants to highlight these points – after all who wants to hear this sort of truth? The reality for most of us is that we will have to work harder, save more and spend less. That’s the sort of forward guidance that Mark Carney ought to be giving us.