No, No, No Governor

Yesterday saw another lamentable performance from the Bank of England.

Some see it as commendable humility and honesty to tell us on many occasions they do not know what will happen next.
It should lead instead to questions about why they employ so many highly paid economists and forecasters if they do not have a well informed opinion. Why issue forecasts at all, if you they are as wrong as the Bank’s have been in recent years, and if even the boss has little confidence in them?

The Bank wanted to get over two messages. One was the green shoots the market sees may not be robust. It may be worse than the Stock Exchange mood of last week. The second was monetary easing and ultra low interest rates carry on for the long haul.

These are both forecasts. I hope both are wrong. This economy needs more savings. That requires higher interest rates than the Bank’s guideline rate. This economy needs better control over inflation. That too requires a sense of monetary discipline.

In the real world people are getting a bit more for their savings than the usual margin over Bank base rate, and borrowers are having to pay a lot more than base. The market is ignoring the base rate in many cases. We are still experiencing the full impact of higher prices from the devaluation, and now face higher prices from commodity rises brought on by easy money worldwide.

What I wanted to hear yesterday from the Bank is how they intend to get from Quantitative Easing to a rational market? How are they going to withdraw all that extra liquidity before it is inflationary? Who is going to buy all the gilts they own, as well as all the gilts the government needs to sell?

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

23 Comments

  1. mikestallard
    Posted May 14, 2009 at 6:52 am | Permalink

    Thank you very much for interpreting what looked to be a very scholarly and cautious statement tinged with political bitchiness!

    One thing that seems to have sunk below the radar is the enormous amounts of toxic debt. I wonder where it is and what happened to it.

  2. Richard
    Posted May 14, 2009 at 7:12 am | Permalink

    What do you think the long term solution is to deliberately inflationary policy-making? We need some mechanism to stop all future governments (inc the next Conservative one) behaving anything like this one in terms of 1) running up public debt and 2) generating inflation through QE.

  3. RobertD
    Posted May 14, 2009 at 7:37 am | Permalink

    The key questions for the govenor is “who will buy the new government bonds when the BofE has maxed out on its £150bn allowance for QE?”, which on current trends will be by the end of this summer, and “when does he think the BofE will be able to have sold all of these bonds back to the market to eliminate QE?”.

    Actually if David Cameron wants to take up Gordon’s challenge to question him on policy at PMQ then this would be an interesting question of Gordon’s “Specialist topic” of advanced economic strategy.

    • Denis Cooper
      Posted May 14, 2009 at 10:42 am | Permalink

      That £150 billion allowance can easily be increased: it would only need a further letter from Darling to King, the gist being:

      “As the MPC judges that further quantitative easing is necessary in order to meet the inflation target, I authorise another £150 billion”.

      The crunch may come when the MPC feels that it can no longer offer a plausible justification for continuing to print money, but that evil day has been put off for at least another three months.

      Regarding the final fate of the gilts being acquired by the Bank – another £6.5 billion this week,

      http://www.bankofengland.co.uk/markets/apf/apfgiltresults090511.pdf

      and

      http://www.bankofengland.co.uk/markets/apf/apfgiltresults090513.pdf

      I previously conjectured that in the end it might be quietly arranged that they were all cancelled.

      On second thoughts I no longer believe that would be feasible, but nevertheless there’s no compelling reason why the Bank should rush to sell them back into the market.

      They could be rolled over, more or less indefinitely, with interest payments from the Treasury either being in the form of gilts, or being used to buy gilts, and similarly if any issues mature they could be replaced by other gilts.

      It’s possible, therefore, that in several decades the Bank will still be holding a very large portfolio of gilts, assets on its balance sheet, debt which the government can continue to roll over indefinitely until its real value has been eroded by inflation.

  4. alan jutson
    Posted May 14, 2009 at 8:12 am | Permalink

    From what I see in the Press this morning, there is some real doubt about how the American bail out Policy is going as well.

    Thoughts are in some quarters, that it is just fuelling the markets, and not much else.

  5. Acorn
    Posted May 14, 2009 at 8:18 am | Permalink

    The answers to the questions in your last paragraph, will decide the fate of the UK economy for the next decade or more.

    Quantitative easing for a government and its central bank, can be compared to the Heroin junkie. The junkie starts off doing a bit at week-ends; no big problem, they can handle it. Eventually they are doing it 24/7, but they still insist they can give it up anytime they want. Then comes the day, blinded by the last hit, they get the dose wrong with the inevitable finish.

    The next big Bubble is now forming, the government credit Bubble. Experts are telling us that this bubble will dominate the global credit markets for years. No answers yet on how the productive part of the economy that manages to survive, is going to supply the resources to shrink this bubble.

    One of the basic equations of macroeconomics is; Savings minus Investment equals Exports minus Imports. For us that means we have to import a lot of foreign capital to balance the equation. Keep praying that foreigners think buying bits of the UK is still worth it.

    Nothing is too big that it can’t be liquidated and the bits sold off to the highest bidders. If there is a continuing need for what that entity did, the market will fill the vacuum quite quickly.

  6. oldrightie
    Posted May 14, 2009 at 8:59 am | Permalink

    It really is a terrible mess.

  7. Brian Tomkinson
    Posted May 14, 2009 at 9:08 am | Permalink

    If, as I suspect, there is an undisclosed plan between the government and the BoE to inflate their way out of this colossal government debt, would an incoming Conservative government scrap that plan or meekly acquiesce?

  8. Freddy
    Posted May 14, 2009 at 10:36 am | Permalink

    I rather suspect that the Government is currently fixated on avoiding another property crash. Or rather, not so much avoiding it as deferring it until the next Parliament.

  9. Steve Tierney
    Posted May 14, 2009 at 11:22 am | Permalink

    They wont answer your questions because they don’t know the answers.

    I do not believe there is going to be any attempt to withdraw all that quantitatively-eased money at all. It’ll simply stay out there and be massively inflationary.

    Actually, I’m not sure they ever actually planned to withdraw the ‘liquidity’. That was just a promise to keep their tame economists docile.

  10. Adrian Peirson
    Posted May 14, 2009 at 1:16 pm | Permalink

    Now would be a good time Generals, we will all look the other way.

    • mikestallard
      Posted May 15, 2009 at 6:46 am | Permalink

      Have you never heard of Antonio Tejero?

      • Adrian Peirson
        Posted May 16, 2009 at 12:05 pm | Permalink

        You clearly do not understand where the EU is taking us, it will make Soviet Russia or Mao’s China seem like a practice run, which by the way, they were.
        The same people are behind the EU, Soviet Russia and Mao.

        • mikestallard
          Posted May 16, 2009 at 4:19 pm | Permalink

          Yes, I agree with all that. Lefties all – and as narrow minded, bigoted and determined to bring in the age of Aquarius. Or is it the classless society, I forget.
          The army, however, is definitely not the answer.
          First of all, if you use blind force to get your own way – and that is what the army is for – you make people deeply angry and they don’t forget in a hurry. That means an end to peace for generations. (Ireland? Poland? Rhodesia?)
          Secondly, the generals in the army are highly politicised because they, like everyone else, are paid for by the executive. This means that they have to sacrifice their pensions, income and, perhaps, even their pips and crowns and swords to commit high treason.
          Come on, not even a politician would do that!

        • Adrian Peirson
          Posted May 23, 2009 at 5:45 pm | Permalink

          You are forgetting they also have Chemical and Biological Weapons, the recent swine Flu is a weaponised variant, just like the foot and mouth was that accidentally leaked ou of purbrite labs and decimated our Dairy Herd.
          communists do not like Private property and Farmers being independant of their control.
          This autumn and winter looks set to be bad with regards to the Swine flu, civil contingencies Bill at the ready.
          Forced Vaccinations.
          Baxter Pharmaceuticals recently shipped Flu Vaccine to 14 EU countries, quite by accident it was found that these Vaccines were contaminated with two LIVE FLU Virus.
          Two weeks ago, a container exploded on a Swiss train which comtained Live Flu Virus.
          You can google all this, you just wont see it on the BBC.
          The EUSSR means business and it will not allow anyone to get in its way

  11. Demetrius
    Posted May 14, 2009 at 3:27 pm | Permalink

    We already know the answer to this, the government is buying its own gilts to keep interest rates down and give the show of solvency by padding up the bits of the national accounts that it has to publish. All done through channels, of course. Some may call it it Enronomics, I might call it Old Mother Riley financial strategy, others who are commenting call it a mess or a disaster. And I am paying for this lot, and have to clean my own moat out.

  12. Acorn
    Posted May 14, 2009 at 5:54 pm | Permalink

    “Never in the field of human conflict was so much scammed by so few from so many”. (Apologies to Winston).

    There must be a bright young Colonel or Brigadier in our armed forces, who knows what must be done to save this nation.

    Gentlemen. The Queen.

    • mikestallard
      Posted May 15, 2009 at 6:39 am | Permalink

      When I said this to my brother, a Colonel in the British Army when Wilson was doing his bit for the Socialists, he just went terribly quiet. I think it is the army way of being very, very shocked at appalling tactlessness.

  13. Jack
    Posted May 14, 2009 at 6:39 pm | Permalink

    The problem for the Bank of England is keeping interest rates low enables the banks to recapitalize, and is a way for them to rebuild much needed reserves to cover past and future losses. It is not for the benefit of the individual in the short-term. The higher lending rates enable banks to achieve this objective via its spread.

    The lack of accountability since the systemic failure and the non removal of ‘moral hazard’ from the banking system, which may re-appear in time, when this mess has been overcome, should be a key objective of our democratically elected guardians going forward.

    It is the british tax payer that will ultimately have to pay for these massive losses both directly and indirectly via the higher costs of future borrowing and taxation. Our collective obsession with house prices and getting rich quick has proven our Achilles heel in this respect.

    Unfortunately, this is a far more important issue then claiming expenses on moats, tennis courts and home-flipping to gain financial advantage; which as an issue, seems to be so diversionary, compared to the scale of the financial mess we are all in. MP’s expenses may however prove to be the last straw for the British public. It should be the role of for the MP to communicate dangers and champion truthfully any implications that will address this mess.

    If only housing costs had remained at reasonable levels to earning capability and money was not created via ‘debt’ we would not be so dependent upon this boom-and-bust cycle. MPs should investigate if the underling problem has been caused by use of a fiat currency? The Bank of England is not the only weak link in this process.

    If green shoots are around the corner, inflation must be kept in check and if not, inflation must be kept in check. It is so tempting for any government to just inflate its way out of this mess, but this would erode any savings held by individuals particularly the old and vulnerable. Not everyone has benefited from this boom. QE or printing money on the other hand will lead to inflation, as currency is devalued further, inflation once out of the box is very hard to control. While it is far better to save for the future, the public must have the confidence that conservative values would be rewarded both individually and for the collective good in the long-run. There is no such thing as free money.

  14. Brian
    Posted May 14, 2009 at 11:15 pm | Permalink

    GB says the UK will grow its way out of recession.

    How will this growth be achieved?

    We don’t appear to be doing anything more efficiently.

    We are not encouraging entrepreneurial activity.

    The credit card is maxed out.

    I think if you exchange the word grow for inflate then you are on the right track.

    Bad news if you have money or are on a fixed income.

  15. Adam Collyer
    Posted May 15, 2009 at 3:22 pm | Permalink

    There is so much confusion about the phrase “money supply”.

    In normal times, we say that low interest rates will boost the money supply (and therefore potentially cause inflation). But when we say that, we are using the term “money supply” loosely, to really mean the quantity of money in the economy. Reductions in interest rates encourage people to borrow, and discourage saving, and therefore increase the quantity of money in the economy via the banking system. In turn, low interest rates are appropriate for a recession. But this depends on there always being as much credit available as anyone wants, which is normally the case.

    But at the moment I believe we have a real shortage of money supply in its true sense, i.e. the supply or availabliity of credit. People and companies want to borrow, but the banks won’t lend. Lower interest rates discourage lending, thus reducing the supply of credit. The price mechanism works here as with any other commodity.

    If this is true, it is serious, because the implication is that the economy WILL NOT RECOVER until interest rates go up – but the authorities are likely to respond to further signs of economic weakness by keeping rates low.

  16. Jonathan Tee
    Posted May 15, 2009 at 10:05 pm | Permalink

    JR said: “Why issue forecasts at all, if you they are as wrong as the Bank’s have been in recent years, and if even the boss has little confidence in them?”

    Surely a better question would be ‘why are the models the Bank is using unable to describe the current market?’ Another question would be ‘if the models in use are not describing the market, why have other models not been sought?’

    George Soros has some thoughts on this in “The New Paradigm for Financial Markets” which may be worth a read if you’ve not already.

    That the Bank of England analysts are unable to describe the current market in their models is not necessarily an absence of information – in fact it may be actionable information. If the information from the Bank’s analysts is along the lines of “we can’t determine what is happening in the market” then one may wish to consider whether radical action (such as quantitative easing) is appropriate in the face of such uncertainty.

  17. Sally Copperwaite
    Posted May 17, 2009 at 8:02 pm | Permalink

    Milton Friedman may not have been right about everything but he was right when he said ‘inflation is always and everywhere a monetary phenomenon’. The Bank of England and the MPC bear a huge responsibility for allowing the biggest build up of credit and debt in our history. They completely ignored the growth of M4 in setting interest rates. You could argue that M4 was already growing too fast from 2001 to 2004, but from mid 2004 onwards M4 growth has been out of control. The housing and equity bubbles were an inevitable consequence of an incredibly lax attitude to the growth of the money supply. The Governor should definitely be fired when the Conservatives win the next election. The really annoying thing about this economic crisis is that the people responsible for it will walk away with huge pension pots and may well end up in the House of Lords!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page