Trading Floor

VAT to be cut to 15 percent

Fraser Nelson — 2008-11-22T22:05:25+00:00

It looks like Brown will cut VAT from 17.5% to 15% - the lowest the EU will allow. This would be the crux of Monday’s recession budget. The move costs £12.5bn and the idea would be to get retail sales moving, then jack up VAT later. The threat of the increase, of course, being the point of the stimulatory push. And put VAT back up to what? Robert Peston has speculated a 22.5% level. Crucially, it also seems the deficit will be £120 billion a year by 2010-11. The other bits and pieces include £5bn projected efficiency savings (but after the election, natch). The wee basic rate taxpayer rebate – designed to atone for his 10p tax debacle – will also last another year as suspected and the Met Office may be flogged.

P.S. The temporary VAT cut, of course, is what Ken Clarke outlined to The Times. Good to see Tories making policy again, at least in part.

Daily Brief

2008-11-21T18:54:22+00:00

Even before receiving a frosty reception on Capitol Hill this week when they asked Congress for $25 billion in government aid, Detroit executives expressed a willingness to give up some of their sacred cows (if not yet their private jets).

General Motors, for instance, said it would not advertise on the Super Bowl in February -- a major concession, considering that it's been one of the three biggest advertisers on the N.F.L. championship game over the last two decades years.

What if that's not enough in these trying times? What if G.M -- and Ford and Cerberus/Chrysler -- stopped advertising all together? Would that be enough to save them? Almost certainly not: It would barely scratch the surface of the money they need. But it would probably kill their sales -- and take a wide swath of the media industry down in the bargain.

In the first seven months of the year, the big three spent $2.8 billion on U.S. media according to a new report from The Nielsen Company. G.M. accounted for $1.3 billion; Ford, $953.3 million; and Chrysler, $592.6 million.

Big numbers, to be sure. But still only 10

Who will take over Citi?

2008-11-21T18:52:20+00:00

As John Carney notes today, Citigroup's market capitalization is $21 billion; that of Goldman Sachs is $20 billion. Can anyone say "merger of equals"? Nothing's unthinkable in this market, not even the idea that you can tie two rocks together and hope that they float. Reportedly Lloyd Blankfein approached Vikram Pandit with a merger proposal in September, and was rebuffed; now, however, the matter is out of Pandit's hands, and Citi's board might be more amenable to such a suggestion.

A Citi-Goldman merger would give Citigroup much more credible management, assuming that the Goldman guys took over most of the top jobs, and would give Goldman a much-needed deposit base, not to mention huge distribution capacity through Smith Barney. An enormous number of Citigroup investment bankers would surely lose their jobs, but that is probably going to happen anyway. Meanwhile, Goldman's investment bankers would suddenly see their deal pipeline fill up with the job of selling off all the bits of Citi they had no interest in keeping.

Possibly more likely is the idea that Citigroup will be nationalized this weekend, with shareholders being wiped out. John Hempton today

Cleggy calls for exit from the EU!

2008-11-21T14:38:44+00:00

No, really, Nick Clegg calls this morning for the UK to leave the European Union. No, I'm not making this up either. It's really rather an odd thing for the europhile leader of a near federast party to argue for but there it is.

That means taxing capital gains as income, harmonising pension tax relief and stopping big companies from taking operations offshore to avoid tax.

It's that companies going offshore thing which is the problem. The EU guarantees, insists upon, the free movement of goods, labour and capital. Its also made very clear in court rulings that the free movement of people includes legal persons like companies. It is in fact illegal to stop a company changing its domicile and thus its tax jurisdiction.

In fact, they've evengone further and under what is known as the Bolkestein Directive, created a method of company organisation which allows any company (although you would want to be of reasonable size, a couple of hundred people or more, to undertake the expense) to relocate anywhere in the EU...or EFTA or the EEA. BP and Shell could move to Liechtenstein tomorrow and nobody could stop them.

So if the Cleggmeister is arguing that

Somewhat shaming...

2008-11-21T14:24:22+00:00

...to find myself agreeing with Larry Elliott here.

There are many reasons to be afraid - very afraid - about the state of the world, but a sterling crisis is not one of them.

I quite agree, but what sort of sterling crisis are we talking about?

This is the crisis with just about everything. Failing banks, the drying up of credit, crashing house prices, rising unemployment, weakening growth and - as the official figures showed yesterday - a ballooning budget deficit. Students of economic crises will detect only one thing is missing from this litany of woe - a sterling crisis of the sort that Britain went through in 1967, 1976 and 1992.

Ah, well then there's a simple answer to why we don't have to fear such a sterling crisis. It would be impossible for us to have one of that sort.

You'll recall that back in 90-92 we were trying to shadow the DMark? We had, in effect, a fixed exchange rate with respect to our EU partners? The crisis came when the markets decided that we weren't going to be willing to go through the interest rate pain, the contraction of the

Jam today, jam tomorrow but never jam again

James Forsyth — 2008-11-21T11:34:10+00:00

This morning’s FT lays out just how bad a state the public finances are in:

“Annual public borrowing is set to rocket towards £120bn over the next two years – far higher than City forecasts – forcing Alistair Darling to announce plans for deferred tax rises and public spending curbs when he presents his pre-Budget report next week.
...
The consensus forecast is for borrowing to hit 6 per cent of national income, or £90bn, next financial year, but the Treasury expects the rate of deterioration to continue apace, suggesting the budget deficit will hit 8-9 per cent of gross domestic product over the next two years, close to £120bn – three times the European Union’s deficit limit.
Such high levels of borrowing, unseen even in the 1970s, will automatically push public sector debt as a share of national income well on its way to 60 per cent, a figure that dwarfs the current limit of 40 per cent.”

Now, the political consequence of this—as the FT notes—is that Darling might have to announce deferred tax rises in the PBR. If he does, then

How the Fed can stave off deflation

2008-11-20T20:23:00+00:00

Harvard economist and former chairman of the council of economic advisors, Grega Mankiw has some thoughts:

Suppose the Fed cuts the federal funds rate once again to, say, 25 basis points. More important, at the same time, the Fed announces a target path for the price level as measured by the core CPI. The price path might be, say, an increase of 2 or 3 percent per year. The Fed promises not to raise the fed funds rate over the next 12 months and, after that, will keep the funds rate at that low level as long as the price level is significantly below its target path.
The credibility of the promise is paramount. To get long-term real interest rates down, the Fed needs to convince markets that it will vigorously combat deflation, and that if deflation happens in the short run, the Fed will reverse it by subsequently producing extra inflation. A credible promise of subsequent price reversal after any deflation ensures that long-term expected inflation stays close to the inflation rate implied by the Fed's target price path.

Daily Brief

2008-11-20T18:33:46+00:00

There has been much discussion in the blogosphere about whether Goldman Sachs should go private. (A good summary can be found here.) One could forgive such wistful thinking today, as shares of Goldman fell below its initial public offering price.

When Goldman went public in May 1999, at $53 per share, it was a watershed event. The firm was the last big Wall Street partnership to go public. The decision to go public had set off intense debate within the firm and ultimately led to the resignation of Jon Corzine, the co-chairman and co-chief executive who had pushed for an I.P.O.

Under Corzine's successors, Henry Paulson and then Lloyd Blankfein, Goldman and its stock price advanced to new heights. The shares traded as high as $248 last year.

But like other financial stocks, Goldman shares have been battered by the credit crunch and the evaporation of business in markets and deals. The stock has fallen nearly 40 percent this month alone.

Today, the shares fell to a low of $52.35 before hovering around $53 by midday.

The recent sell-off is bad news for the sage of Omaha, whose investment in Goldman was seen as a rare bright spot

Ugly

2008-11-20T18:32:31+00:00

If you thought that the sudden sell-off from yesterday afternoon would reverse itself in morning trade, think again: this is looking increasingly like a secular down market rather than simply a case of high volatility. Citi's down further this morning, a vote of confidence from one of its largest shareholders notwithstanding; Berkshire Hathway's tumbling too; and Americans are now being laid off at the rate of more than half a million a week. Oh, and the market cap of the entire New York Times Company is now less than $1 billion, which is less than it paid for the Boston Globe in 1993.

Finally, a large chunk of the stock market is trading at the kind of distressed levels which have been implied by the bond market for a good year now. The problem is that the bond market is falling just as fast, which means that the disconnect between the two is still there: if you think that shareholders are bleeding, just look at the state of bondholders. Given that the bond market has been a good leading indicator of where the stock market is going to go, I can't get bullish about

Green economics

2008-11-20T12:45:21+00:00

Oh please, not this stupidity again.

The Government provoked protests from campaign groups yesterday as it began Europe's first auction of carbon emissions permits but admitted that the proceeds would not necessarily be used to tackle climate change.

The Treasury said that it had raised £54 million through the sale of four million permits for £13.60 per tonne under the next stage of the European Union's Emissions Trading Scheme (ETS). Yesterday's auction marked a departure from the policy of handing out the permits to industry for free. By 2012, in the second phase of the scheme, 85 million permits will be auctioned, possibly raising more than £1 billion for the Treasury. From 2013, this figure is expected to rise to about £2.5 billion a year, according to WSP, the environmental consultancy.

Campaigners said that the Treasury's decision to put the proceeds into its coffers rather than ringfencing them for use in environmental projects plays into the hands of critics, who fear that the ETS will be treated as little more than a green tax.

Robin Oakley, the head of Greenpeace's climate change team, said: “Investing in new low-carbon technology while making our