Sterling is warning the government and the MPC

On Monday the slide in sterling got faster, with the pound having its worst day since the collapse following sterling’s troubled times within the Exchange Rate Mechanism that the British establishment had favoured in the early 1990s. This need come as no surprise.

The Establishment’s latest wheeze of a so called independent Monetary Policy Committee turns out to be as ill judged as the ERM. The ERM led to inflation first, then recession, by forcing the country to take interest rates which were too low, followed by rates that were too high. The so called independent Monetary Policy Committee has done exactly the same thing, without the excuse that they are on autopilot determined by the value of the currency. They have resolutely steered the vehicle by looking in the rear view mirror. They are now about to make their third big error, of setting rates too low for the extent of government borrowing and the fears in the international community about the UK’s financial situation. They left lowering rates too late, pushing us into a bad recession. Now they are taking undue risks, because of the fiscal expansion. Fear of low rates is one of the factors behind the sterling collapse, because investors think the UK is still borrowing too much.

The truth is that both the UK and the US are following policies which will force a cut in living standards. For years both these economies have been living well beyond their means, thanks to easy access to credit from the strong exporting nations and commodity producers who were generating big surpluses. It has been possible for both the great Anglo Saxon democracies to run large balance of payments deficits, large government deficits and large deficits in the personal sector. People and governments have spent too much and borrowed to do so.

Now the world’s markets are saying enough is enough. Living standards in both the public and private sector are being brought down by a combination of government policy and market reaction. The private sector has to sell more abroad and consume less at home. The government sector has to get closer to just spending what it can collect in taxes.

Whilst the recession will force the private sector to contract, there is currently no mechanism to make the public sector take some of the pain. The outgoing President, Mr Bush, is a spendthrift who sees no need to rein in spending at the end of a long period of overspending. The incoming President, Mr Obama, was elected to spend more. The Prime Minister in the UK thinks spending and borrowing more is the right thing to do in the circumstances, and is busily trying to bail out chunks of the private sector which would otherwise have to adjust more quickly to the painful reality that we have been living beyond our means.

On both sides of the Atlantic the authorities have made the decision that most manufacturing will simply have to contract, shedding jobs, closing factories, putting people onto three or four day weeks to slash pay. Meanwhile they have perversely decided to feather bed the bankers, who are arguably more inefficient and much more highly paid than the manufacturers. Both administrations have poured money into banks which should have been told to raise their own capital by reining in their expenditures. The authorities should have given them temporary loans, not permanent capital. I see no reason why taxpayers should pay bankers bonuses in these conditions, when the finance industry needs to get its pay down quickly to sort itself out.Far from being fair or just, so far the pain is being concentrated on parts of the private sector, making the job losses there worse.
Reading the atrocious story of Baby P sums up so much of what has gone wrong in the UK public sector. There was no shortage of highly paid managers, auditors, box tickers and process controllers. The more of these we employ, the less well it seems the task is performed that they are meant to be doing. The UK public sector needs to deliver more for less. It needs its teachers, nurses, doctors and social workers, but it does not need such a colossal army of pen pushers, time servers, mock managers and reviewers, let alone its battalions of spin doctors and management consultants. If the government wishes to speed the end of recession, it needs to start to get the government to live within its means. That requires changes within every service, and a very different approach to inefficient banks paying their senior staff too much.

PS: What a disappointing article in the Mail! As any reader of this site will know I have gone blue in the face trying to get the government and the MPC to take the necessary action to limit the damage and to arrest the downturn. The last thing I want is a cut in living standards and a recession. It is a bit rich for them to criticise me for explaining what is happening and what will happen – which is a fall in many peole’s living standards as the job losses mount in the private sector, coupled with pay awards falling behind this year’s inflation, when I have opposed the very policies of this government which have landed us in this mess. Try again Labour – that one was wide of the mark. It is my caring about the poor outlook for so many British people that leads me to write this blog and to urge policy change to help more people more quickly than the current lethal policy mix will achieve.


  1. […] Sterling is warning the government and the MPC […]

  2. Tony Makara
    December 2, 2008

    A very fine article Mr Redwood. I feel that most politicans do not pay enough attention to forex. Economic policy must be built on two fundamentals. Price stability and a stable currency. Nothing can be achieved without these two pillars in place. I’m pleased that the opposition is holding the government to account over the health of Sterling. Its an issue that may not immediately register with most voters, but they must be made aware that the Pound in their pockets is losing value with each passing day.

    Keep Sterling in the news.

  3. […] John Redwood on his blog says that the fall in sterling shows that the UK is living beyond its means and that living standards need to be cut. […]

  4. Lola
    December 2, 2008

    Mr R you said – “The UK public sector needs to deliver more for less…” I agree as this is what private business does day in day out. Why can’t government and government bureaucrats get this through their thick heads? Eh? Just why?

    But the answer is blindingly simple – get government out of any sort of service provision. It just can’t do it efficiently and never will. In theory you could even run the Army on mercenaries, but I do draw the line at that. So onec you are in power will you (a) privatise – as in get government out of everything possible and (b) cut spending?

    1. Bazman
      December 3, 2008

      How about the banks Lola? Did they deliver more for less? Should we privatise them? What if you do not have the money to afford private everything? Private healthcare means for instance in the case of eye care, if the hospital makes a mess of your sight and you run out of money the state will pick up the tab as it is in the long term cheaper than letting you go blind. How about the railways privatisation fantasy too. Thanks for the dogma. Work in finance do we?

  5. Joe Jackson
    December 2, 2008

    Excellent article. We need to hear more of this in the MSM. Interest rates need to rise encouraging people to save; savings increase capital in Banks and Banks can then lend to wealth producing industry. Increased interest rates also deter people from taking un-necessary risks and making poorly judged investments, they would also return the housing market to a more sustainable model.

  6. Derek
    December 3, 2008

    Further to previous comment, I found the article from today’s Daily Mail on their website, here is the link in case you haven’t seen it yet:

  7. […] can hear the echoes of Mellon in the current advice of John Redwood. “Now the world’s markets are saying enough is enough. Living standards in both the public […]

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