The report is called The Future of Food and Farming, and was put together by the Government Office for Science in London. It pretty much said we need a new agrarian revolution, or else global starvation will become a major challenge in the decades ahead.

So who put the report together? Well, it involved 400 leading experts and stakeholders from about 35 low-, middle- and high-income countries across the world.

And these are the key conclusions.

“The global food system will experience an unprecedented confluence of pressures over the next 40 years. On the demand side, global population size will increase from nearly seven billion today to eight billion by 2030, and probably to over nine billion by 2050; many people are likely to be wealthier, creating demand for a more varied, high-quality diet requiring additional resources to produce. On the production side, competition for land, water and energy will intensify, while the effects of climate change will become increasingly apparent. The need to reduce greenhouse gas emissions and adapt to a changing climate will become imperative. Over this period globalisation will continue, exposing the food system to novel economic and political pressures.”

The report said that “hunger remains widespread, with 925 million people experiencing hunger. Perhaps another billion are thought to suffer from ‘hidden hunger’, in which important micronutrients (such as vitamins and minerals) are missing from their diet, with consequent risks of physical and mental impairment. In contrast, a billion people are substantially over-consuming, spawning a new public health epidemic involving chronic conditions such as type 2 diabetes and cardiovascular disease. Much of the responsibility for these three billion people having suboptimal diets lies within the global food system.”

The report then said: “Many systems of food production are unsustainable. Without change, the global food system will continue to degrade the environment and compromise the world’s capacity to produce food in the future, as well as contributing to climate change and the destruction of biodiversity. There are widespread problems with soil loss due to erosion, loss of soil fertility, salination and other forms of degradation; rates of water extraction for irrigation are exceeding rates of replenishment in many places; over-fishing is a widespread concern; and there is heavy reliance on fossil fuel-derived energy for synthesis of nitrogen fertilisers and pesticides. In addition, food production systems frequently emit significant quantities of greenhouse gases and release other pollutants that accumulate in the environment.”

So that’s pretty depressing stuff. What can be done?

The report said: “New technologies (such as the genetic modification of living organisms and the use of cloned livestock and nanotechnology) should not be excluded a priori on ethical or moral grounds, though there is a need to respect the views of people who take a contrary view. Investment in research on modern technologies is essential in light of the magnitude of the challenges for food security in the coming decades.”

And yet while it wants to see new technologies, it also warned of risk associated with that. It said: “The human and environmental safety of any new technology needs to be rigorously established before its deployment, with open and transparent decision-making.”

And that’s the problem. The world’s population is growing, and food needs to be produced in greater quantities. To do this, new technologies need to be developed, but there are risks associated with that.

We don’t want to be too dismissive of this report – we are sure it is broadly right. But scientists do have a tendency to fail to grasp how economies and businesses tend to react to changing conditions. The food challenge will inevitably to lead to new ways being found of producing food.

As for current levels of starvation. The problem here is not so much that not enough food is produced, rather it is the way the food that is produced is distributed.

 See: The Future of Food and Farming: Challenges and choices for global sustainability

The Guardian quoted Abdolreza Abbassian, an economist at the UN’s food and agriculture organisation, as saying: “We are entering a danger territory.” He warned: 2There is still room for prices to go up much higher, if for example the dry conditions in Argentina tend to become a drought, and if we start having problems with winterkill in the northern hemisphere for the wheat crops.”

The Independent said: “As more Chinese enter the middle classes they tend to consume more poultry and meat, just as Westerners did at a similar stage in their economic progress. However, meat and poultry husbandry consumes at least three times the resources that grains do, while the drift towards the cities in China is reducing the yields of its farms.”

Yet, conversely, Capital Economics has argued meat consumption per head in China is already close to the levels seen in the West, and much higher than in Japan. People who warn that the rise in China will lead to a rise in meat consumption overlook this. Okay, as China develops we may see consumption of different meats – at the moment, pork accounts for the majority of China’s meat consumption. But it is hard to see how the development of China will lead to much more meat consumption overall.

As for the argument that the drift from the countryside to the cities is reducing yield from China’s farms, that’s a tricky one. It is true to say that China is running out of workers. As a consequence, we are likely to see wages rise in China over the next few years. But is that a good or a bad thing? If food is going up in price in China because Chinese workers are earning more, then isn’t that the very trend economists have been crying out for?

Some argue that higher food prices in China will lead to social unrest. Well, they might, but just bear in mind that a high proportion of China’s population produces food, so if the prices they receive go up, then they will be better off. Rising food prices in China may actually benefit a huge number of its populace. And for that matter, if food prices across the world are being driven up by demand as some countries get richer, then actually this may be a good thing, because the result will be improved income in countries that rely on farming, and quite often (although not always) these happen to be the world’s poorest countries. In other words, rising food costs could lead to redistribution of income from rich to poor.

It all depends on what’s causing the price rises. Rising demand may be one factor, but there are supply problems, too.

The worry relates to the possibility that there are deeper forces at work here.

You could say food prices have partially been pushed up by bad luck, a series of natural disasters ranging from drought to floods across the world. Bad luck won’t last for ever, so if this explanation is right, food supply should improve, helping to alleviate food inflation. Of course, if it isn’t bad luck, and we are seeing fundamental change in the global weather pattern, then that’s another matter entirely – and far more serious – but it is probably too soon to tell if that is what’s really happening.

This is what key indices, commodities and currencies did in 2010.

The truth is, gold is a classic bubble product. George Soros has said as much, calling the gold boom the “ultimate asset bubble”. It is a classic bubble commodity for the simple fact it goes up for no reason other than that it always does in times of insecurity.

Gold is not like oil, which is driven by economic fundamentals. Oil goes up in price because demand for energy rises while supply is limited. Gold rises because people believe in it, but they believe in it for no reason other than that people always have.

That’s why Keynes once called it a “barbarous relic”, and why Warren Buffett was once moved to say of gold: “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

And for those reasons, economists have never been that fond of gold. Gold production does not help us produce more, it doesn’t make the world wealthier. As King Midas found out, you can’t eat gold, and you certainly don’t want to find that everything you touch turns to gold.

Peter Bernstein, the late economics historian, said in his book, The Power of Gold, that you can fit all of the world’s gold supply into an oil tanker.

Warren Buffett said that all that gold would fit into a container 67 feet or so across, and yet it would be enough to buy all the farm land in America, ten lots of Exxon Mobiles, and still leave you $1 trillion worth of change.
And what would you rather have, enough land and oil to supply the needs of a big chunk of the human race, or a pile of metal that isn’t good for much other than pretty jewellery?

Economists also don’t like gold because as a means of defining money, it has one fatal flaw. The supply of gold is entirely unrelated to the global economy’s productive capacity of goods and services. A global economy that links the money supply to the supply of gold, is one that can not realise the potential in new innovation. Unless, that is, by chance there is a new discovery of gold.
So the discovery of gold in the New World may have paved the way to the Industrial Revolution – although it created hyperinflation in Spain and Portugal during the hundred years or so after the conquistadores.

And yet gold rises because we have learnt in times of trouble it always does. Why buy gold? – because it is gold.

So the euro, dollar, pound and yen are in a race to the bottom. China doesn’t want to play ball. So gold rises.

Others fear that all this quantitative easing will lead to hyperinflation, so gold rises.

Others say we may get deflation, so gold rises.

In other words, a gold bull may say: “The answer is gold. Now, what’s the question.”

If the powers that be that run the global economy have any sense, then they absolutely will not enter into a new gold-based currency standard. We suspect the fears of both hyperinflation and deflation are overdone.

Capital Economics argues that in real terms gold is still below its all-time high, that the price of gold in ounces is approximately 15 times greater than the price of oil in barrels. But the average since 1970 has been 16.

But so what. Why has the average gold-oil ratio been 16 since 1970? There is no good reason. Besides, the gold-oil ratio could equally be implying that oil is too expensive.

Economists put too much emphasis on the relationship between prices in the past. They don’t take into account the forces of randomness, and how we can then be influenced by random forces to think we have seen a relationship, which in turn influences our behaviour and for a while can indeed create a relationship between two indices. Until, that is, fundamentals come into play and we see a crash.

To our way of thinking, gold has bubble written all over it, and the boom in gold is irrational. But then so too was the last gold boom, and yet it made a lot of people very rich. And as Keynes once said: “The markets will remain irrational longer than you can stay solvent.”

Mr Oldham said: “2011 will be the first for 12 years during which the FTSE 100 breaks into new ground, finishing the year at or above 6,750. As businesses look forward to a leaner, more efficient post credit-crunch world, investment and earnings will rise on the back of continued low interest rates. However, the year will not be without serious volatility, particularly due to successive crises in the Eurozone leading ultimately to some disorderly restructuring.”

He also predicted rises in sterling, which could threaten the UK recovery, but said: “The UK market performed well in the 1980s with a strengthening pound and we think it may repeat this experience.” Finally, Mr Oldham predicted “a good recovery” for BP, that the service sector and mid/small caps will continue to do well on the back of potential merger and acquisitions activity, and said: “We favour Carillion, Centrica, Prudential and CPP. Our two favoured stocks for 2011 are Experian and, as our shortest term high risk play, Churchill Mining.” But said that fears over Eurozone debts will hit the banking sector, and that Lloyds Banking Group will probably be the first of the government-supported banks to be ready for a part flotation in 2012. He also expects another good year for Germany.

So much for equities and bonds.

What about the UK property market? Well, this grid pretty much sums up what CML reckons:

CML concludes that: “Activity in housing and mortgage markets is set to remain broadly flat in 2011 and we do not envisage a return to the lending levels that characterised the middle of the last decade for many years to come.”

CML may be right, but next year will almost certainly see average households become worse off as wage inflation lags behind retail price inflation. If the forecast from McKinsey Global is right, and global real interest rates are set to rise over the next few years, then beyond 2012 the outlook for UK house prices is very ropey. See: Interest rates set to rise as economic tectonic plates shift – is this good or bad news?

Well, just a few hours later another story emerged, this time from the International Energy Agency, which said we have in fact already passed peak oil; that global oil output peaked in 2006. It said that the onset of global recession, leading to a fall in demand, was the only reason why oil did not carry on rising once it passed $140 back in the summer of 2008.

To see a more comprehensive analysis of peak oil and the arguments for and against, see yesterday’s piece: Peak oil is less than a decade away

It seems there are two theories on oil. One theory says that oil goes up and down in price following a regular cycle. This theory looks at what economists call elasticity of demand, and the idea goes like this. In the short run, oil is something we just must have. So, as price goes up, demand is barely affected – or, if you will, we have inelastic demand. But, the theory continues, in the long run, demand is actually quite elastic. If oil stays high in price, we change our habits. We buy more fuel-efficient cars, for example, or insulate our lofts.

And this is how the theory pans out. Oil goes up in price – the reason does not matter, just take this one as a given. To begin with, we all suffer, and recession may even be the result. But over time we learn to adjust, and bit by bit demand starts to fall. But oil companies, being run by people who have no understanding of economic cycles, don’t realise this. They can see price is high, then their finance directors enjoy something of a high from counting all the profits, and so they engage in an orgy of exploration.

A few years pass. Thanks to the oil exploration splurge, supply of oil is up. Thanks to the way we changed our habits and learnt how to be more economical with our use of oil, demand was lower. And all of a sudden price crashes. By the late 1990s, oil was around $10 a barrel, having fallen dramatically from its price of a few years earlier.

At this point we enter the next stage in the cycle. Oil is cheap, and bit by bit we become more careless in the way we consume it. Fuel efficiency goes out of fashion. We yearn for Ferraris, or other fuel-guzzling beasts. Meanwhile, oil companies suffer from cheap oil and they slash their exploration budgets.
And so the cycle turns again, and oil shoots up in price like it did during the second half of the noughties.

Those who sign up to this theory tend to laugh off the idea of peak oil. It is not that they don’t believe a permanent decline in the supply of oil would be dangerous, they just don’t see it as very likely.

The peak-oilers, on the other hand, reckon we are running out. And some then go on to argue that black gold, or oil as some people call it, is the lynchpin of the modern economy. Within a few years of peak oil, we will see an irreversible descent into a new Stone Age.

Their critics see this as ridiculous. They point towards the tar sands of Alberta, Canada, for example, and say there is plenty of oil out there, just begging to be drilled into.

Two other developments make the issue more complex.

First there’s the credit crunch. It seems this may have had a twofold effect. As recession descended upon the world, demand for oil fell, and therefore so did its price, with a barrel of oil falling from around $145 in the summer of 2008, to less than $40 six months or so later. So the credit crunch pushed down on demand. But maybe the lack of credit also meant less money was available to fund further oil exploration. So in the short run, the effect of the global economic crisis was less demand for oil. But in the longer term, the effect may be less supply. So the anti peak-oilers can argue that the fall and rise in oil can still be explained by their economic cycle theory.

The second development relates to a certain Deepwater Horizon oil rig. The peak-oilers see this disaster as evidence of how oil is becoming harder to reach. Most people probably agree by now that BP has applied quite breathtaking technology in dealing with this disaster, but the fact remains that despite this, oil is becoming so hard to get at that disasters such as this increasingly are inevitable.
Those who dismiss peak oil simply argue that the BP oil spillage is a blip. And furthermore, a blip that is being compounded by the US. They argue that our expertise in learning how to tap into oil lurking in the deep places of this planet is improving. And that if we see an oil drilling ban in the Gulf of Mexico leading to a fall in supply, then this is not evidence of peak oil, merely evidence to show the US is a fickle beast.

It seems that the UK Industry Taskforce on Peak Oil and Energy Security (ITPOES) falls into the peak oil camp. Well, frankly, judging by its name, you would expect that. It warns of the “increasing importance of deepwater drilling to global oil supply,” which it says is “expected to constitute 29 per cent of new capacity by 2015, up from only 5 per cent today.” And argues that “the result is that any future delays or problems associated with deepwater drilling will have much greater impact on supply than is the case today.”

The taskforce has been set up by various businesses, and counts Sir Richard Branson, among others, as a patron.

In a report out earlier this year it said: “Having assessed the systemic changes caused by the global economic recession, coupled with the projected growth from non-OECD countries, ITPOES predicts Peak Oil will occur within the next decade, potentially by 2015 … The study finds that the recession has delayed the oil crunch by two years.”

The taskforce reckons peak oil will occur at around 95 million barrels per day, against production levels of 85 million barrels per day in 2008. In other words, demand only needs to increase by just over 10 per cent, and wham, oil goes shooting up.

The report’s authors may or may not be right, but there is one respect in which we agree with them.

Peak oil does not have to be the disaster some say it will be. The problem with oil is that trillions of dollars have been invested into it. But there are alternatives out there. Critics of wind and solar say they are nowhere near as efficient as means for generating our energy needs as oil, but can we really say that. If wind and solar power had a fraction of the money spent on them that has been thrown at oil, it seems pretty reasonable to argue they would become far more efficient.

In some ways peak oil may prove to be a good thing. If we turned out attention to other, renewable, forms of energy, or maybe heaped resources on genetics research, so that the maverick geneticist Craig Venter faced competition in his efforts to turn algae into a cheap form of energy, then in the long term we may end up with a source of energy that is much cheaper than oil is at the present, and which would not be subject to the vagaries of the economic cycles based around the folly of human nature.

The taskforce says that more urgent action is needed from government to address the threat of peak oil following the Gulf of Mexico oil spill. It urges the UK coalition government to take action to reduce the impact of the oil crunch by 2015.

See Peak Oil – Implications of the Gulf of Mexico oil spill, for the ITPOES report and see click here  for Investment and Business News articles on the alternatives to oil

“The stock market has forecast nine of the last five recessions,” or so the economist Paul Samuelson once said. But the big question now relates to whether Samuelson’s idea works in reverse. In other words, are stock markets as poor at predicting recoveries as they are recessions?

Of course, the Dow enjoyed very impressive rallies after the crash of 1929, leading many experts to forecast the end of the downturn. And yet the leading US stock market index did not pass its pre-crash high until 1954. By contrast, it took just two years for shares to recover from the 1987 crash.

There is a difference between those two famous crashes, of course. I929 marked the beginning of the Great Depression; and historians are still puzzling over the 1987 fall, with some even arguing it was something of a statistical quirk.

Last night the Dow hit 11,435, the highest level since 8 September 2008, and the FTSE 100 hit 5,863, the highest level since June 2008. The two indices are still way down on their all-time highs. The Dow peaked in October 2007 with a score of 14,164, and the FTSE 100’s highest level was set on 30 December 1999 with a reading of 6,930. (Incidentally, the pre-dotcom bust high for the Dow was set on 14 January 2000: 11,722.)

But what is a little strange about yesterday’s movements, or at least superficial analysis makes it seem strange, is that gold, normally seen as a safe refuge in times of crisis, hit a new all-time high, and the yield on US and UK government bonds fell quite sharply.

But actually, there is a good reason for the seemingly contradictory movements. It all boils down to those horrible two words, quantitative easing, or QE.

The Fed revealed plans on Wednesday to create $600bn worth of new money over the next year or so. The move was anticipated by just about everyone. Or at least, markets knew more QE was on its way, but in fact the consensus was for an even bigger stimulus. So that does make the market reaction a tad odd. After all, it’s supposed to price-in changes it expects. But then again, sometimes momentum on its own can be enough to push markets up.

Observe through the prism of QE the seemingly contradictory movement with securities that are supposed to do well in times of boom, rising with other securities that are seen as a safe refuge also surging, and things make more sense. After all, the Fed wants to drive up bond prices by buying these securities, and thereby make equities look cheap. That is the main purpose of QE. If equities surge, we will feel better off. Pension deficits will shrink, and may eventually turn into surpluses. As a consequence, companies will be able to afford to invest more, pay out bigger dividends, or even up the wages of their staff. At least that’s the theory.

But then again, if we were to say QE is not very popular, it would be an understatement along the lines of saying “folks around here are unenthusiastic about suffering another world war.”

And in the build up to the Fed’s revelation of more QE, and indeed in the aftermath, analysts queued up to explain why they felt the measure would be ineffective. In fact, it is actually quite hard to find fans of this particular measure outside of the central banks in the Big Apple and the Big Smoke (London).

Oh, apart from George Osborne, that is, who seemed to suggest that we should praise him for his fiscal policies because as a result of the measures he has taken, the Bank of England is more likely to introduce more quantitative easing. He said: “Fiscal credibility allows the MPC to do what it has to do, raising interest rates, lowering interest rates or using any other monetary policy tool. It gives them flexibility.”

But the US political scene is less clear cut. Thanks to the results of the midterms, Republicans now control the House of Representatives, and are likely to vote down any attempt by Barack Obama to introduce fiscal stimulus, meaning that if you want to stimulate the economy, QE is the only game left in town.

But actually, there are other reasons for market exuberance. Markets were cheerful earlier this year, too. After all, the US had been enjoying pretty impressive growth figures. But then, come the spring, bad news started to emerge. The data that seemed particularly to spook the markets were the purchasing managers indices from CIPS/Markit in the UK and from ISM in the US.

You may recall, back in the spring the PMI for UK manufacturing hit a 15-year high. The index tracking new export orders hit an all-time high. In the US the story was similarly bullish, with the PMI for manufacturing hitting 60.4, the highest reading since 2004. The indices tracking services were up, too. And then things went pear shaped, falling steadily, with the new export order index for UK manufacturing at one point suggesting contraction was under way. The steady decline in these key barometer indices fuelled fears of a double-dip recession. But this week, the October versions of the various PMIs were out, and they looked good. The PMI for UK manufacturing enjoyed its first improvement in seven months. The CIPS/Markit report tracking services had the headline index hitting its highest level since June. The US equivalents of these reports also pointed to a rebound.

Perhaps the most promising piece of data relates to jobs in the manufacturing sector, with the CIPS/Markit report suggesting jobs are being created at the joint fastest rate since the mid 1990s.

Hand in hand with the more promising economic data, company results are up too, and while a cynic might question why equities are rising so fast, it needs to be borne in mind that forward p/e ratios, that’s projected profits versus current market cap, remain quite modest by historical standards.

There are two big snags, however.

Before the economic crisis descended on the world, there were two underlying problems which don’t seem to have been solved.

Firstly, we had global imbalance. Here there is some room for optimism, and in China at least there are signs that consumption is beginning to take off, leading to the world’s economic growth engine being more evenly balanced, and thus more likely to become a source of consumption for the rest of the world. But in Europe, the same old problems are dominant. Germany still sells more than it buys, and the likes of Ireland and Greece still seem to be heading for oblivion.

Secondly, we have a problem that is rarely discussed but which is incredibly important.

During the boom, the elixir that is economic growth did not fully soak through the system into people’s wages. The boom saw a disconnect between economic growth, and growth in household disposable income. Moving forward, it looks as if household disposable income may be set to fall. Indeed, this process has already begun on both sides of the Atlantic. And if households become worse off they will spend less; eventually corporate profits will fall, and output will contract. Right now, the economic system is not porous, wealth is not trickling down. And until it does, the great crisis of 2008, or would that be the great crisis of 2000, will not come to a complete end.

For more on declining household affordability, see: The US and UK economy may be growing, but households are suffering a nasty hit

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

Consumer demand is everything for the economy. It matters not what companies invest, or what asset prices do; if consumers are not buying stuff, then everything else will eventually grind to a halt. There is no debating this. Production and investment, and buying frenzies and investment crazes, count for nothing if, beneath it all, consumer demand is not there to support the activity.

It is obvious. In the UK, VAT is founded on this principle. One business sells to another and charges VAT. The business that buys this product claims the VAT back, adds a bit to the product and sells it on to another, and charges VAT. And so the process continues until we reach the end of the line, the consumer. This is where VAT is charged but not claimed back. This is where value is no longer added, and the consumer pays the tax on the entire production process. All production will eventually soak through the economy and reach the consumer.

And yet the importance of the consumer gets forgotten. During the boom of the noughties, consumers got forgotten as GDP soared, but in the UK, discretionary disposable income shrunk. In the US in 2007, corporate profits as a percentage of GDP hit an all-time high, pushing up equity prices, but the rise in profitability did not filter through to consumers in sufficient quantities. Growth was propped up during this period because consumers ran up ever greater debt, which was never going to be sustainable. In the noughties, the fruits of globalisation and new technology were not distributed from company coffers to consumers. Recession should have occurred sooner as a result, but instead, rising consumer debt delayed the inevitable correction, making it far worse when it finally came.

But the consumer is in trouble again. In both the UK and the US, households are becoming worse off, and next year are set to become even poorer as wage rises lag behind price inflation. Data out this week from the US adds to this tale of woe. For more, see today’s piece: The US and UK economy may be growing, but households are suffering a nasty hit

And as this column keeps saying, don’t forget the retirement of the baby boomers. The baby boomer generation across the developed world needs to spend less and save more. There is no alternative, this must happen, and it will happen.

And yet, despite problems for consumers, asset prices keep soaring. The yield on US and UK government bonds has dropped to silly levels. The Dow is flirting with a year high. It hit 11,188 last night, against 11,205 in April which in turn was the highest reading since before the collapse of Lehman Brothers. (And if you are interested in such things, it is now 544 points off the pre-dotcom crash high.)

This begs the question, why are equities so high, while consumers are so hard up?

There are two answers to this question.

First of all, it’s down to QE. Certain central banks are buying bonds, pushing the price of bonds up, making equities seem cheap, pushing their price up too. This is precisely what the Bank of England and the Fed want to happen. They are hoping that higher asset prices will make households feel better off, and encourage them to go out and spend. But why would consumers do this when their disposable income is so stretched and when house prices are looking so vulnerable? This begs the question, are the central banks in the UK and the US fuelling an asset bubble?

The second answer to the question why are equities so high, throws a different light on the subject. Maybe equities have been rising because US corporates are making more money. Indeed, if you look at the forward p/e ratio for S&P 500, that’s to say market cap versus what markets expect profits to be next year, the ratio comes out at 12.7, a perfectly reasonable level.

But then again, how is it possible for corporates to be making more money when the person who will ultimately buy the fruits of corporate production, the consumer, is so hard up?

The obvious answer is that US company valuations are justified because the US can export its way forward. Well, this may prove to be right, but at the moment this view does smack somewhat of wishful thinking.

But the issue becomes more interesting when we look at a fascinating gem of information to come out of the US yesterday on what money is doing. Yesterday, it was told here how the velocity of money circulation, that’s the speed at which we spend, is rising, bringing with it fears of inflation. See: Velocity matters, so is the money supply really in such a state?

Well, here is a piece of news that at least on the surface supports the velocity of money proposition: according to the American Association of Individual Investors, holdings of cash in the US are at their lowest level since March 2000.

So, if we are holding less cash, presumably this means we are spending much faster. QE may be ineffective in terms of boosting the broad money supply (that’s the money supply including such things as credit), but if we are spending money more rapidly, QE is still boosting the economy, and may be creating an inflationary effect that neither the Bank of England nor the Fed have fully factored in.

But then again, as was said in today’s piece, The US and UK economy may be growing, but households are suffering a nasty hit, while the US and the UK economies expand, households in both economies are becoming worse off.

It seems to us that QE is not shoring up inflationary problems for the future, simply because the money being created is not reaching households. Instead, it is fuelling an asset bubble. This is why the likes of Nobel winners Paul Krugman and Joseph Stiglitz say QE on its own is ineffective, and instead, governments need to control how the money that is created is spent via fiscal policy. The results of the US mid terms mean this won’t happen.

The last time holdings of money were so low was in March 2000. Back then the rises in the velocity of money did not herald a new era of inflation. Instead, it was a symptom of the fact we were in bubble territory. Dotcoms crashed. Instead of inflation, we apparently got NICE, non-inflationary, consistently expansionary. In reality, what we got was a bubble, because the wealth created did not pass down the chain to the consumer, but instead funded lending and then boosted house prices. Today, the assets that are booming are different, but something similar is happening, and tears will follow.

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

But actually, the real danger of a sterling crisis was in 2009. At one point in March of that year, there were just 1.06 euros to the pound. You may recall Tory MP come former stalking horse, John Redwood, talking about a new sterling crisis creating the need for rapidly rising interest rates. He said it was all down to the UK government’s massive debt.

Indeed, for a while it did seem as if parity with the euro was inevitable, although the pound’s fall was odd. Markets were selling pounds and buying euros because they were worried about the UK’s fiscal debt, when the fiscal debt crisis across much of the Eurozone was even worse.

In time things settled down; a certain amount of reason returned to the markets, and sterling rose.

Then for a while during the heady days of this summer, talk about the impending spending review led to a rally in the pound. Not so long ago, many economists were predicting 1.25 euros to the pound soon.
Instead, it has fallen back.

For that matter, the dollar has fallen back against the euro, although against sterling the exchange rate has been around its current level for much of this year.

The obvious reason for sterling’s fall has been increased speculation that the Bank of England is set to kick off another round of quantitative easing. See: Cracks turn to gaping chasm at heart of Bank of England rate setting committee

It is the same with the dollar. Another round of QE across the pond seems inevitable.

But bizarrely there also seem to be growing doubts over the wisdom of the spending cuts.

Professor Christopher Pissarides hit stardom recently when he won the Nobel Memorial Prize for Economics. See: And the winner is, the new Nobel prize for economics is handed out to … but does it mean anything?

And now, the esteemed academic has chosen the most esteemed of Britain’s newspapers, the Daily Mirror, to sound off: Laying into the theory behind George Osborne’s cuts.

In an article for the paper he said: “Unemployment is high and job vacancies few. By taking the action that the Chancellor outlined in his statement, this situation might well become worse…These risks were not necessary at this point. He could have outlined a clear deficit-reduction plan over the next five years, postponing more of the cuts, until recovery became less fragile. The ‘sovereign risk’ would have been minimal.”

To be honest, the publicity afforded to Mr Pissarides’ views across the UK media was a tad strange. Yesterday the BBC reported on his article, saying it was a real blow for Mr Cameron when a Nobel prize winner criticises his plans. In fact, Nobel prize winners have been queuing up to take pot shots at the Osborne plan. The winner from two years ago, Paul Krugman, and former laureate Joseph Stiglitz, have also spent plenty of time trying to demonstrate their Keynesian credentials.

In fact, it is possible to place too much emphasis on what Nobel winners think. Recently, Peter Nobel, a lawyer and descendent of Alfred Nobel, said: “The Economics Prize in memory of Alfred Nobel should be criticised on two grounds. First, it is a deceptive utilisation of the institution of the Nobel Prize and what it represents. Second, the economics prize is biased, in the sense that it one-sidedly rewards Western economic research and theory.
“Alfred Nobel’s testament was not a hasty piece of work. It was a carefully thought out document. Also, Alfred Nobel’s letters suggest that he disliked economists.” See: The Nobel family dissociates itself from the economics prize

Besides, for every economist who thinks one thing, you can find someone else whose views are the polar opposite. Other economists are saying the spending review doesn’t go far enough. If you put an infinite number of chimpanzees together with an infinite number of typewriters, then sooner or later one of them will come up with the complete works of William Shakespeare. But if you have an infinite number of economists with an infinite number of computer models, it seems unlikely any of them will get a forecast right.

Whether the spending cuts are a good or a bad thing we discussed here quite recently, see: Spending review: Osborne reveals his gamble, will it pay off?

But what one can say is this: sterling is falling thanks to the likelihood of more QE and doubts related to the fiscal deficit reduction plans.

If the UK is really going to expand over the next few years via exports and higher investment, then the country probably needs a low exchange rate. Some of the recent gains enjoyed by the pound, and talk of further gains to follow, were not helpful.

The recent drop in the pound may be bad for those of us hoping to holiday abroad. It may be bad for importers and bad for inflation. But for the prospects of UK PLC for enjoying a sustained recovery, this trend is good.

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