Eeyore's news and a view

Heading for zero
By Roger Bootle
Central banks are making history. Last week's 1pc cut took interest rates down to 2pc, the level that they were last at in 1951, which was the all-time low since the Bank of England was formed in 1694
What now? I think that interest rates around the world should be cut to zero – and what's more, I think they just about will be. But why stop at zero? Why not send interest rates negative? The answer gets to the root of a monetary economy and hints at why deflation is so dangerous. The answer is cash – i.e notes. They do not carry interest, positive or negative. This imposes a limit on what can be done with bank deposits.
If banks, under leadership from the central bank, tried to impose negative interest rates on bank deposits, people would withdraw money and hold hoards of cash on which no negative interest rate was incurred. There might plausibly be some reluctance to hold large amounts of cash for convenience or security reasons, and accordingly banks might be able to levy a small negative interest rate on deposits without prompting a stampede to cash.
But it could only be small, not least because it would be open to other banks, or indeed completely new banks, to start a new business simply taking in cash to look after for safekeeping in return for a small fee.
I can already hear some clever-dicks rushing to send me "oh yes they can" messages. And I admit that there are some isolated examples of technical quirks. In 1978, for instance, the Swiss authorities managed to impose negative interest rates on foreigners depositing in Swiss francs.
Some people were prepared to accept negative interest rates because they hoped to offset this loss with a capital gain as the Swiss franc rose on the exchanges. Even this episode applied only to non-residents in special circumstances and did not last long.
And in the Great Depression in the US there were instances of negative rates. The prices of Treasury Bills at auction occasionally exceeded par, thereby giving a small negative yield. But these were exceptional quirks, and they do not offer a way of breaking through the zero limit.
There is, however, a theoretical way of breaking through it, namely to date notes and make their value decline with time. But this would play havoc with the monetary system which, after all, is founded on the idea that a pound is a pound, whenever the note was printed. So take it from me, interesting little quirks aside, rates cannot go negative.
So once rates have reached zero, what can central banks do? They have two tools in their armoury. First, they can keep interest rates at zero for a very long time. This is pretty much what Japan has done. The importance of this is that once the markets believe that rates are going to stay low for a long period then longer term rates of interest, principally the yield on government bonds, will fall as well. Lower bond yields will reduce the cost of finance for companies and will underpin the value of equities and commercial property. This process has already started. The yield on UK long government bonds has fallen to 3.8pc, the lowest since 1951.
Second, central banks can embark on what is known in the trade as "quantitative easing". This simply means the central bank buying securities in the open market. This is not a new-fangled idea. It is known in the textbooks as open market operations and was advocated by Keynes, amongst others.
A central bank would normally prefer to buy government securities – such as bills and bonds. But it can also buy private debt, and in extremis even equities – as the Bank of Japan did in the 1990s. Such a policy is designed to do two things. First, it will lead to rising prices – i.e. lower interest rates – on such paper, and thereby help to bring the interest rates on such assets as close to zero as possible.
Second, it will increase the amount of central bank money in the system. The banks will find themselves with more and more reserves piling up. The hope is that at some point they will lend this money rather than just sitting on it.
In theory, there is no limit to the amount of quantitative easing that a central bank can undertake, thus allowing the government to use expansionary fiscal policy to stimulate activity without limit. Suppose that the government cuts taxes, financed by issues of bonds, which the central bank buys. Central bank money rises and the government distributes this money to the citizens. This is the equivalent of Milton Friedman's famous helicopter drop and amounts to the same thing as Keynes' suggestion in the 1930s to stuff bottles with £5 notes, bury them and employ people to dig them up.
It sounds so easy. What is the rub? This policy is indeed the answer to persistent and deep-seated deflation. Stand by: if we ever get that far I'll be advocating it! But it did not solve all of Japan's difficulties in one fell swoop. The problem is that central banks do not know how much quantitative easing is required to bring an end to deflation.
This creates something of a dilemma. If they conduct a lot of quantitative easing they risk overdoing things and turning a deflation problem into an inflation problem. You only need to look at Zimbabwe to see how expanding the money supply can lead to uncontrollable inflation. However, if they adopt a piecemeal approach and do little bits of quantitative easing here and there, they run the risk of allowing the deflation to continue, as happened in Japan.
Believe me, it is better if we don't even get to this point. There is a clear incentive for policymakers to reach zero interest rates as quickly as possible. If there is even a small possibility that the economy is heading for deflation, is it better to do all you can to prevent it before it begins.
Otherwise, once deflation kicks in, the real interest rate – that is the nominal interest rate less inflation – rises. In other words, deflation automatically tightens policy exactly at a time when it should be loosened. So rates should be rushed to zero.
There is a view that once rates get to 1pc or 0.5pc the central bank should desist from further cuts on the grounds that they should not "use up the last shot in the locker." Why not? If a Red Indian is rushing towards you with a tomahawk, ready to cut off your head, what is the point of not shooting him on the grounds that if you do bring him down, there may be another Indian coming along later?
http://www.telegraph.co.uk/finance/comment/rogerbootle/3658646/Heading-for-zero.html

In lean times, SoCal residents trade guns for food
Record Number of Gun Owners Trade Weapons for Food, Gift Cards
By THOMAS WATKINS Associated Press WriterLOS ANGELES December 8, 2008 (AP)
Los Angeles County Sheriff Deputy Jeff Gordon, right, and colleagues examine and process weapons yesterday, in Compton, Calif. The sheriff's department on Sunday completed its annual Gifts for Guns program in Compton, where residents could anonymously relinquish firearms in return for a $100 gift card for Best Buy, Target or Ralphs. (Ric Francis/AP Photo)
A program to exchange guns for gifts brought in a record number of weapons this year as residents hit hard by the economy look under the bed and in closets to find items to trade for groceries.
The annual Gifts for Guns program ended Sunday in Compton, a working class city south of Los Angeles that has long struggled with gun and gang violence. In a program similar to ones in New York and San Francisco, the Los Angeles County Sheriff's Department allows residents to anonymously relinquish firearms in return for $100 gift cards for Ralphs supermarkets, Target department stores or Best Buy electronics stores.
Turning in assault rifles yields double that amount.
In years past, Target and Best Buy were the cards of choice, with residents wanting presents for the holidays.
This year, most asked for the supermarket cards, said sheriff's Sgt. Byron Woods.
"People just don't have the money to buy the food these days," he said.
Authorities said Sunday that a record 965 firearms and two hand grenades were handed in during the two weekends the program was in operation. That's more than in any other year and easily eclipses last year's total of 387 guns collected over both weekends.
Compton's violent history has been chronicled in such gangsta rap albums as N.W.A.'s "Straight Outta Compton." But Woods said most of the residents who turned in weapons were "family people."

"One guy said he had just got laid off from his job," Woods said. "He turned in five guns and said it would really help him to put food on the family's table."
Gun owners dropped their weapons off at a local grocery store parking lot. Deputies checked the weapons to see whether they had been used in crimes, then destroyed them.
The annual drive started in 2005 after a spike in killings, though the murder rate has since dropped.
One man brought in a Soviet-era semiautomatic carbine.
"If that got into the wrong hands of gangbangers, they could kill several people within minutes," Woods said. "Our biggest fear is a house getting burglarized and these guns getting
The drive also has yielded antique weapons.
Gift cards for the guns exchange were paid mostly by Los Angeles County, but the three companies involved and the city of Compton, which contracts the county for police protection, also donated funds.
http://abcnews.go.com/US/wireStory?id=6414376

Report: Iran rocket arsenal tripled in 2008
In a signthat Iran is taking military measures to ward off the threat of an attack on its nuclear facilities, the country has tripled the number of long-range rockets in its arsenal, Channel 10 reported on Monday.
According to the report, Iran possessed 30 Shihab-3 missiles at the beginning of 2008. Currently, the country claims to have over 100 over long-range missiles capable of hitting Israel. While the ability of the Islamic Republic to strike any point in Israel has long been known, this latest build-up potentially points to an Iranian intent to launch a protracted counter-strike against those who seek to destroy its nuclear program.
The Jerusalem Post could not confirm the report.
Last summer, Iran held a massive missile exercise during which it claimed to have launched an improved version of the Shihab-3, known to have a range of 1,300 kilometers. The Iranian Fars News Agency Web site reported that the Shihab-3 had recently been equipped with an advanced guidance system that significantly improves the missile's accuracy and can correct its flight plan in midair.
http://www.jpost.com/servlet/Satellite?cid=1228728112652&pagename=JPost%2FJPArticle%2FShowFull

Eat camels to protect environment, Aussies told
Dec 9 03:01 AM US/Eastern
Australians were urged Tuesday to eat camels to stop them wreaking environmental havoc, just months after being told to save the world from climate change by consuming kangaroos.
A three-year study has found that Australia's population of more than a million feral camels -- the largest wild herd on earth -- is out of control and damaging fragile desert ecosystems and water sources.
The Desert Knowledge Cooperative Research Centre, which produced the report, plans to serve camel meat at a barbecue for senior public servants in Canberra on Wednesday to press its point.
Report co-author Professor Murray McGregor said a good way to bring down the number of camels was to eat them.
"Eat a camel today, I've done it," he told the national AAP news agency.
"It's beautiful meat. It's a bit like beef. It's as lean as lean, it's an excellent health food."
Similar claims are made for kangaroo meat, but the rationale for farming and eating the national emblem -- as outlined by the government's chief climate change adviser in October -- is different.
Millions of farm animals such as cows and sheep produce massive amounts of harmful greenhouse gases, said Professor Ross Garnaut, but kangaroos emit negligible amounts of methane.
Unlike the native kangaroo, camels were introduced into Australia as pack animals for the vast outback in the late 19th and early 20th Centuries, but were released into the wild as rail and road travel became more widespread.
The country has wrestled for years with imported animals brought in as beasts of burden, food sources, for recreational hunting or, ironically, to control agricultural pests.
The Department of the Environment lists animals of "significant concern" as including feral camels, horses, donkeys, pigs, European wild rabbits, European red foxes, cats, goats and cane toads.
With few natural predators and vast sparsely populated areas in which to roam, the populations have soared, putting pressure on native species by preying on them, competing for food, destroying habitats and spreading disease.
http://www.breitbart.com/article.php?id=081209070110.gs8vvzpt&show_article=1

UK has a problem with their pension also
Pension schemes face £155bn shortfall
Almost 90pc of defined benefit pension schemes in the UK were in the red at the end of November as falls in stock markets hit the value of their assets.
By James HallLast Updated: 11:41PM GMT 08 Dec 2008
The Pension Protection Fund (PPF), the pensions lifeboat fund, said yesterday that 6,690 pension schemes had a deficit at the end of last month, compared with 6,468 in October. The schemes in deficit at the end of last month face a collective funding shortfall of £155bn. Just one year ago, this figure was £58.3bn.
Once pension funds with a surplus are included in the figures, the total funding shortfall faced by all defined benefit schemes was £136bn in November, compared with a deficit of £97.3bn at the end of October.
In November, the total number of schemes in surplus was 1,047 – just 14pc of all schemes – compared to 1,273 in October. In November 2007 there were 2,400 schemes in surplus.
Last month alone there was a 0.5pc decrease in assets due to falling UK and global equities. At the same time, lower gilt yields in general led to an increase in liabilities of approximately 5.2pc.
"Over the past year, the falling equity markets and bond yields have led to an overall worsening of the funding position. Lower bond yields resulted in a 4pc increase in aggregate liabilities, while weaker equities have reduced assets by 18.7pc," the PPF said.
The PPF was established three years ago to pay compensation for members of defined pension schemes when their employers became insolvent. Pensions experts predict an increase in claims in the current environment.
Woolworths, the stricken retailer whose retail and distribution arms are in administration, could become one of the biggest burdens on the PPF if a last-minute rescue deal cannot be struck to save the retailer.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3685259/Pension-schemes-face-155bn-shortfall.html