News from across the pond

There's been a lot of news in Europe over the past 24 hours. Tony Blair announced that he's going to step down on June 27th, paving the way for current Chancellor of the Exchequer and every gold bug's arch-enemy, Gordon Brown.

In an emotional speech he apologised for the times he "fell short" as leader but said it had been an "honour" to lead the "greatest nation on earth". .

"I have been Prime Minister of this country for just over 10 years. In this job, in the world today, I think that is long enough for me, but more especially for the country," he said.

"Sometimes the only way you conquer the pull of power is to set it down."

Mr Blair said that he will leave his position as soon as a new Labour leader is elected - a process that is likely to take seven weeks and result in the appointment of Gordon Brown.

Elsewhere in the U.K., as widely expected, the Bank of England raised interest rates to 5.50 percent, the highest level in six years. It seems the Monetary Policy Committee, led by Mervyn King, has temporarily allowed the inflation monster out from its glass confines.

The increase is likely to add an estimated £16 a month to the average mortgage bill for households with a typical £100,000 mortgage, which experts said could lead to a rise in home repossessions and insolvencies.
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Mervyn King, Governor of the Bank of England, said he would use interest rates to control inflation, and many economists fear another rate rise will be necessary to bring inflation back onto target.
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Homeowners with a £200,000 repayment mortgage have already seen their yearly mortgage payments increase by more than £1000 since August last year as a consequence of rate rises.

The increase announced today adds a further £267 onto their annual mortgage bill. Researchers at financial information service Moneyfacts said that a further rate rise to 5.75 per cent as predicted would add another £270 onto that bill, bringing the total increase in payments since August 2006 to over £1500.

Around half of all mortgage payers are on a variable rate mortgage, meaning that they are immediately vulnerable to changes in interest rates.

Housing charity Shelter and the Citizens Advice Bureau have both warned that these rate rises could have a disastrous effect on homeowners whose finances are already finely balanced.

Finely balanced is perhaps too generous a characterization. According to this report($) in the Wall Street Journal, they're in debt up to their eyeballs over there.

Debt has helped power the British economy's ongoing success, and consumers have spent even as growth in their disposable income has stagnated. Debt, however, is at the heart of the present uncertainty, and debt levels in Britain are certainly eye-catching.

Personal debt has reached a record $2.6 trillion. According to the Organization for Economic Cooperation and Development, U.K. household debt as a percentage of annual disposable income hit 159% in 2005 -- the last year for which data is available -- compared with 135% in the U.S.

British banks lost a record $13.6 billion to bad consumer debt last year and are tightening their lending standards. Market leader Barclays PLC says it now declines half of all credit-card applicants. Such forced belt-tightening may be working: For the first time since the early 1990s, credit-card spending last year fell, by 2.2%, from the previous year's level.

Skyrocketing home prices have, in effect, force-fed the debt. Home prices have more than tripled over the past 15 years.
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"More and more of people's money is tied up in servicing mortgages," says Chris Tapp, associate director of Credit Action, a debt-education nonprofit in Lincoln. "That means people are having to borrow more and more for just ordinary day-to-day living expenses."

And on the continent, the European Central Bank left rates unchanged at 3.75 percent. According to this Bloomberg report, ECB President Jean- Claude Trichet has once again vowed strong "vigilance'' in the battle against the little guy (inflation monster) and made clear the bank's intention to raise interest rates next month.

Trichet has used the word "vigilance'' to signal each of the seven rate increases since late 2005. The ECB is preparing the ground for an eighth step as the economy of the 13 nations sharing the euro expands at close to the fastest pace in six years, raising the risk companies will increase prices and wages.

"June's a done deal and Trichet is leaving the door open for further increases,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc. in London. "The market has already priced this in.''
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Adding to the ECB's concerns, money-supply growth, which the bank uses as a gauge of future inflation, unexpectedly accelerated in March to the fastest pace in more than 24 years.

Trichet said that while M3 growth remained "vigorous,'' past interest-rate increases "are influencing monetary dynamics,'' and "we're reasonably happy to see that M1 has slowed down.'' He added that he "would say the same for the loans to the private sector.''

While ECB economies appear to have had a smaller boom in recent years and fewer potential problems today, they are not without their share of concerns. At least they are looking at money supply growth as shown in this chart from Econoday.


The U.K. and the U.S. both seem bent on ignoring how much money and credit has been created, secure in the knowledge that the wheels aren't about to fall off based on dubious consumer price indexes. At least the ECB acknowledges that money supply growth is somehow involved.

How many years can money supply growth increase at multiples of the "inflation" rate?

More importantly, what happens if it stops growing at these elevated rates?