Bill Jamieson: Splash the cash and let the sun shine
THIS poverty consciousness is not real, there is plenty of money – but those who have it are holding on to it.
Now here is a paradox of our time, and one, you may agree, that is the biggest and most pressing. Nobody has got any money – or at least not as much as we once had. There seems no money for spending, for lending, or for saving and investing. Household incomes are squeezed. Pay is trailing inflation. Millions are suffering a fall in their real after-inflation spending power.
This squeeze, combined with the rise in VAT to 20 per cent, has clobbered the consumer-facing sectors of the economy – retail in particular. There is barely a high street that is not pock-marked by fire sales, boarded-up premises and vacant sites. Among those who have survived, life is tough. This week Marks & Spencer told of a first quarter 5 per cent fall in non-food sales. Even among businesses not prone to weather-related downturn, securing any growth in sales is a struggle.
Capital spending programmes have been cut. Small businesses can’t get loans. Mortgage lending is barely half what it was five years ago. Pension fund deficits are billowing. Everywhere there evidence of cash shortage. “Money is tight”; “money is short” is the message every week from shoppers, retailers and businesses.
But money shortage? Really? What money shortage? The great paradox of our age is that never in our post-war history has the UK economy had more money pumped into it or so much money stashed away by banks, companies and households.
From bank reserve holdings through cash held by companies and household assets dwarfing liabilities, Britain is awash with money. But it’s money that, where not squirreled away, is strangely disappearing.
Let’s start with the Bank of England’s resort to “quantitative easing.” By a few deft strokes on a computer keyboard, the Bank has created £325 billion – buying up the gilt edged holdings of banks and turning this into short-dated securities and cash. To this total the BoE added a further £50bn earlier this month. Now the economic gurus are already talking of the total hitting £500bn by the year end. This is a colossal sum which cannot but beg searching questions as to where it is all going.
Let’s start with the £325bn. It was intended, inter alia, to boost lending to the business sector and provide more funds for mortgages. But far from easing, the cost of new loans to small firms has risen - with the average interest rate up from 3.1 per cent in April to 3.83 per cent in May. And spreads over Bank Rate, to the outrage of this same group, have doubled from the pre-crisis days – from 167 points over base to 333 points.
As for mortgage lending, approvals for house purchase fell from 51,600 in May to 51,100 in May – this level stubbornly stuck at round half the pre-crisis norm.
Banks, meanwhile, have been stuffing money in their mattresses as if there’s no tomorrow. And at this rate there may well be no tomorrow.
Their gilt holdings now stand at £104bn while total “high quality” liquid assets are at a record £356bn – and rising. “This surge in liquid assets”, Citi group economist Michael Saunders laconically adds, “clearly is doing little to improve credit availability”.
Then there are huge amounts that business is storing up on its balance sheets. Estimates of this cash pile vary widely. In a recent paper on the corporate cash mountain, Andrew Milligan, head of global research at Standard Life Investments, quoted estimates of more than $1 trillion for UK and continental European companies, more than double that seen prior to the financial crisis. Debt ratios of top UK companies are at their lowest for eight years. Business investment as a percentage of GDP is at its lowest since records began in 1965.
On Monday our business reporter Dominic Jeff picked up on an analysis by corporate financial health monitor Company Watch. This put the cash hoard accumulated by UK companies alone at about £19bn, with 211 UK-listed non-financial companies sitting on cash of at least £1 million each.
Our top companies are holding off from investment and turning themselves into mini banks while the recession continues.
“UK plc” does not have a liquidity problem. It has a thumping great confidence problem. And the same is true of institutional investors. Their portfolios are groaning with overseas government and corporate bonds as the money received from QE has poured into these and not gone into UK shares.
On the contrary, the first quarter saw institutional investors slashing their UK share portfolios by £12.6bn net.
Then there’s the pension fund money the government would dearly like to tap for infrastructure projects. Certainly pension funds have enjoyed a sharp rise in contributions from companies desperate to cut their pension deficits. But here QE has put the UK company pensions sector on a deadly treadmill.
The aggregate pension deficit has shot from £18bn in June last year to £271bn in December, reflecting the effect of the QE-induced drop in gilt yields which has driven up the present value of pension fund liabilities.
These extra pension contributions have to come from somewhere – corporate investment, jobs and pay, to name but three. QE as stimulus? You do wonder.
What then can be done to mobilise these huge hordes of cash? Last week the Bank of England’s Financial Policy Committee took further steps to support lending and growth. It recommended that the Financial Services Authority adapt its regulatory stance to UK banks on their stocks of highly liquid assets.
These, on the FPC’s latest calculations, exceed half a trillion pounds – well in excess of the FSA’s own liquidity guidance.
As FPC executive director Andrew Haldane comments, “This is precisely the point in the economic cycle when some of those assets could be put to work to support credit and growth, not stuffed under banks’ mattresses”.
Hear, hear to that. It would be the most galling or ironies if the greatest financial stimulus ever undertaken in our peace-time history were to result in a liquidity crisis to beat them all.
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Wednesday 19 June 2013
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