The need for prudence

 

Those who write in to say the UK does not need to curb spending or to  control its deficit and who think monetary and financial excess is rewarded should take heed of the messages coming from emerging markets.

At the end of last week the Argentinian peso fell 11%, making imports much dearer and people worse off. The official rate of 8 pesos to the dollar compares with unofficial market rates of 13 pesos to the dollar.  President Christina Kirchner has now had to impose restrictions on internet shopping , and tough  foreign exchange controls to try to stop the flight of money out. Inflation is around 25%. Her policy of higher social expenditures and some nationalisation is not bringing prosperity but a crisis.

The Brazilian real has also been falling. It has moved from around 2 to the dollar a year ago to almost 2.5 to the dollar now. Interest rates have been raised to 10.5% to try and stem the flow. The balance of payments deficit is large. President Dima Rousseff is finding her more generous policies are backfiring and cutting living standards and growth.

The Turkish lira has also fallen sharply, from 1.7 to the dollar a year ago to 2.32 now. Interest rates at 7.75% are thought to be too low by many in the markets. The balance of payments is heading for a very large deficit this year.

Spending and borrowing more do not help in situations like these. These countries are being  forced into new austerity to stop the slide. The art is avoiding getting into such trouble in the first place. That requires some prudence.

 

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31 Comments

  1. Iain Gill
    Posted January 25, 2014 at 9:42 pm | Permalink

    John you are slipping from hyper optimistic posts, over to pessimism, I realise you’re human but surely realism is somewhere in the middle?

    Shares dipped on Friday

    (Para removed ed)
    And yes we need to start paying off the national debt and cutting the proportion of our earnings being spent on the state sector, cut the “aid” budget be a nice token start with universal support on the streets etc

    Oh yes and immigration and the economy are still the voters two main concerns, I note all main parties still have a massive gap between them and the public on immigration

    Etc

    • Hope
      Posted January 26, 2014 at 10:09 am | Permalink

      Argentina still receives overseas aid, why? Foreign policy not to give to countries who persecute gay people, but still gives overseas aid to countries like Pakistan who pursue nuclear proliferation, so it is okay to provide the means to have a nuclear haulocaust, some political correct madness a ttachedt it the foreign policy.

      Does the UK foreign policy dove tail with the EU and why does the UK pay for two foreign offices?

      Iceland doing rather well, I wonder where it would be if it accepted help fron the EU? A good example for Ireland to remember. The Euro epitomises a dead man’s currency for jobs, business and living standards.

  2. lifelogic
    Posted January 25, 2014 at 9:55 pm | Permalink

    Indeed spending, money printing and borrowing does not help – especially when it is usually spent (or rather wasted) on daft things like wind turbines, the carbon religion, bloated government, high speed trains, electric cars, dis-functional health systems, soft loans to bail out the EURO, trying to buck markets, contracts for mates and countless over paid parasitic activities ……….

    Hopefully Cameron is beginning to finally see this, alas too late.

    • Hope
      Posted January 26, 2014 at 10:13 am | Permalink

      Not long before it all changes. Cameron will be on tour like Brown and Blaire. Ironic that a time when labour propose the 50 per cent tax (some of ? ed) its former (senior people ed) do all they lawfully can to avoid paying the rate of tax commensurate with their income. Champaign socialists, no difference between any of them in the LibLabCON party.

      • lifelogic
        Posted January 26, 2014 at 6:38 pm | Permalink

        ’twas always thus for socialists.

  3. Max Dunbar
    Posted January 25, 2014 at 10:09 pm | Permalink

    If, as you confidently predict, there is a ‘no’ vote on the question of Scottish separatism this year would you be in favour of cutting the block grant to Scotland and putting the public sector here on a strict diet? You would have nothing to lose and may in fact gain votes where they matter, in England, as well as improving the public finances enormously. It would be interesting to see how the socialists here would handle cold-turkey.
    One other change that you could make here after the vote in September would be to remove the ‘Scottish’ from Scottish Conservative and Unionist Party. I’m sick of the sight of ‘Scottish’ prefixing everything. Pandering to the Scots in this way earns only contempt.

  4. Andyvan
    Posted January 25, 2014 at 11:02 pm | Permalink

    The race to completely devalue currency is speeding up now. Still I have confidence that our political leaders, ably assisted by (words left out ed) Mr Carney, will continue to devastate savings, export wealth and ruin our country in a very competitive manner. They may even rival Argentina, Zimbabwe and Weimar Germany for catastrophic incompetence, well done them.

  5. uanime5
    Posted January 25, 2014 at 11:02 pm | Permalink

    Let’s compare debt to GDP levels in these countries:

    Argentina: 41.6%
    Brazil: 54.9%
    Germany: 81.7%
    Japan: 214.3%
    Turkey: 35.5%
    UK: 90.0%
    USA: 72.5%

    http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

    Given that several countries with higher debt to GDP ratios than Argentina, Brazil, and Turkey aren’t having the same problems it seems there’s no relationship between the financial stability of a country and their debt levels.

    Reply Try looking at foreign currency debt and foreign exchange reserves

    • Posted January 26, 2014 at 8:51 am | Permalink

      Both unanime5 and Mr Redwood make valid points.

      The word ‘debt’ is used far too loosely. For a start it matters if the debt is held by the public or private sector. The 2008 crash was caused by US private sector debt not the public sector.
      Next it matters whether the debt is held in ones own sovereign currency. The US public debt, which is, is on a par with Greece’s, which isn’t. But Greece are in a far worse position. Incidentally that figure of 72.5% looks on the low side at least according to IMF estimates.
      Thirdly the size of the debt has to be related to the overall health of the economy. Singapore has a debt of about 110% of GDP but I understand it doesn’t worry it in the slightest.
      Fourthly it should be noted that some countries have a remarkably low debt. Like 0.4% for North Korea! And I don’t think we need to take lessons in economics from them!

      Reply A high level of domestic debt can still be a worry – if interest rates rise then the servicing costs on the debt can get very difficult, forcing cuts in other government spending

    • acorn
      Posted January 26, 2014 at 9:31 am | Permalink

      As Billy Blog said, “Argentina had lost control of its currency by pegging and running up debt (public and private) in US dollars. They were continually reliant on export income to remain solvent. Once their export markets became recessed they were unable to pay their foreign-currency debts. Further, by abandoning the peg, they effectively created the same dilemma as Greece would do if it abandoned the Euro. They had massive liabilities in a foreign currency and had to take their chances on default. And, once they abandoned the peg (because they could not longer gain the foreign exchange reserves to maintain it), Argentina’s currency went into freefall … “

  6. Antisthenes
    Posted January 25, 2014 at 11:11 pm | Permalink

    Time after time we see what left wing statist policies and practices do to national economies and it is never something desirable. However the RedEd’s and red faced Balls of this world never learn the lesson from it and still insist that they doing the same thing will have a different outcome. We know what Einstein thought of that but then he was intelligent and rational whereas those of the left are patently not in fact the very opposite is so obviously true.

  7. Posted January 26, 2014 at 1:39 am | Permalink

    The sensible thing for all these countries to do would be to forget about the exchange value of their currencies with respect to the US$ or Euro or whatever. That’s always a big mistake. They just need to make sure they always borrow in their own currencies. ie Don’t take on any foreign debt. Sensibly manage their own local inflation and all should be well!

    The Turkish government are the only source of Turkish Lira. They don’t need to, in fact they can’t, borrow them from anyone else. No one else is allowed to make them!

    The Labour government under Jim Callaghan got worried when they couldn’t keep the pound at over $2. They got into a mess and had to call in the IMF as the Conservative Party never tires of reminding them.

    The Conservative party got it right in the 1980′s when they let the pound float down to about parity with the $ in 1982. It caused some concern at the time but it quickly recovered. It was no big deal in the long run.

    Then again the Conservative Party got into a mess by trying to peg the £ to the DM in the early 90s. The Labour Party never tires of reminding them about that.

    So, if everyone learned from past mistakes economic life would be much smoother!

  8. Steve Cox
    Posted January 26, 2014 at 4:24 am | Permalink

    “Those who … say the UK does not need to curb spending or to control its deficit and who think monetary and financial excess is rewarded should take heed of the messages coming from emerging markets.”

    That sounds like the Labour front bench you’re referring to!

  9. Brian Tomkinson
    Posted January 26, 2014 at 9:41 am | Permalink

    JR: “Those who write in to say the UK does not need to curb spending or to control its deficit and who think monetary and financial excess is rewarded should take heed of the messages coming from emerging markets.”
    I note you say “control its deficit ” rather than eliminate it. Perhaps that’s just recognition of the fact that your Chancellor, despite promising to eliminate the deficit by 2015, is still borrowing £2bn per week?

  10. oldtimer
    Posted January 26, 2014 at 9:48 am | Permalink

    You forgot to mention the basket case that is Venezuela. There currency devaluation caused Ford a £350 million write down.

  11. Gary
    Posted January 26, 2014 at 10:02 am | Permalink

    Money is being sucked out of emerging markets as foreigners repatriate investments. This is ominous, the last time it happened on this scale was in 2008 because banks in the western capitals were on the brink and needed all the funding they could find.

    Taken together with reports of at least one bank refusing cash withdrawals and talk of bail-ins, one may be excused for being very concerned.

  12. alan jutson
    Posted January 26, 2014 at 10:04 am | Permalink

    No long term substitute for living within your means, be it:

    A single person.

    A a Family.

    The Government.

    If you live beyond your means some day you will have to pay it back, the longer and greater you borrow, the more and longer the pain. Simples.

    • Posted January 26, 2014 at 9:16 pm | Permalink

      The Government isn’t living beyond its means.

      All Governments who, together with their supposedly, but aren’t, independent central banks who issue their own currency have to do just that. ie issue currency. They are IOUs of the government without which society wouldn’t function. They have to issue more than they receive back in taxes. It is a logical impossibility for them to do otherwise.

      You can argue that taxes are too high, or inflation is too high, or the resources of society shouldn’t be wasted on the poor and unemployed but that’s not the same as society living beyond its means. In fact society is living at less than its means as industry is working at well below full capacity and many workers are kept idle who could be adding to the general means.

      • Denis Cooper
        Posted January 27, 2014 at 10:44 am | Permalink

        Except that in previous inordinately lengthy exchanges, probably trying the patience of our host, it had been shown that the logic is flawed and there is no intrinsic need to the government to constantly run a deficit; and once again I have to point out to you that the means of a limited government cannot be equated with the means of society as a whole.

        • Posted January 27, 2014 at 1:20 pm | Permalink

          Denis,

          I pretty sure you do understand why the issuance of currency does correspond to a goverment deficit. Both John Armour and I have said pretty much the same thing. I think it was John who said that you seemed unable to separate the actual workings of the monetary system from your political perceptions of what it should be.

          We may not be in agreement on how it should work but we should be able to agree on how it does work.

          • Denis Cooper
            Posted January 27, 2014 at 3:57 pm | Permalink

            The contrary, despite all the obfuscations from yourself and kindred spirits I understand that it not the case that the government must constantly run a budget deficit; and I also understand that you are seeking a theoretical underpinning for an attitude is basically totalitarian while at the other extreme there are those who seek to validate an attitude that is basically anarchist, and I no more agree with you than I agree with them.

          • Posted January 27, 2014 at 11:41 pm | Permalink

            Denis,

            There are two main ways the money supply can increase:

            1) Govts issue it via a budget deficit

            2) Commercial Banks create it when they issue new loans

            So what do you suggest for a growing economy?

            Prohibit 1 but not 2?
            Prohibit both and tell the banks they can’t issue new loans except, perhaps, if they change to 100% reserve banking?

            I would suggest a sensible mixture of both as actually happens. Except, I’d favour less reliance on 2 and more on 1.

            The problem with 2 is that it causes booms and busts as the banks switch their lending on and off to suit their desire to make a profit rather than to suit needs of the economy.

          • Denis Cooper
            Posted January 28, 2014 at 3:38 pm | Permalink

            You seem to have forgotten, or may not have read, that in his first letter to the Governor about the Bank of England Asset Purchase Facility Darling instructed the Bank that it should only buy private sector assets, up to a limit of £50 billion, with the stated purpose of increasing liquidity; and that scope for £50 billion of purchases of private sector assets was retained in his second letter when he instructed that it could also buy gilts, and this time using newly created money. So clearly Darling would not agree with you that if it is ever deemed necessary for the state to increase the total money in circulation then the only way to do that is for the Bank to create it and pass it on to the government to spend; instead if necessary the Bank could purchase private sector assets, when the new money would not migrate into the government’s coffers. Indeed in the US a large chunk of the QE money did go into buying private sector assets rather than Treasury bonds. The fact that in the end less than £2 billion of the £200 billion created by the Bank of England was actually spent on purchasing private sector assets does not change that, it merely reflects the reality that in the UK the primary purpose of QE was always to help fund the government’s budget deficit, in the first episode so that the Labour government could avoid making drastic cuts in its spending during the year leading up to the general election, not to put more money into circulation or “stimulate the economy”.

        • Posted January 28, 2014 at 9:17 pm | Permalink

          Denis,

          I don’t think you’ve thought this through properly. No country issues its money into the economy by buying assets. This just doesn’t make any sense at all. It would involve a large scale nationalisation of land, industry etc which I’m sure we’d all agree was mainly best left in the private sector.

          Start from the beginning when no-one had any money at all or not much by today’s standards. Think of all the money there now is in the economy. All the money in bank accounts. All the money in cash. All the coins in piggy banks. Ask yourself how it came to be in existence? Who issued it? And how?

          Then ask yourself why it is worth anything, even though its not backed by anything at all. No gold. No silver. Nothing.

          • Denis Cooper
            Posted January 29, 2014 at 12:50 pm | Permalink

            We’re not talking about how it started in the distant past, we’re talking about whether there is any theoretical reason why modern governments are compelled to constantly run budget deficits, as you would obviously like our government to do, and answer is that there is no such theoretical reason.

            Which you might have deduced from the fact that there are a few respectable countries around the world where the politicians who form the government are not allowed to run up ever-mounting debts on behalf of the people in order to further their own political and personal interests, and the economic systems of those countries have not seized up from want of money in circulation.

          • Posted January 30, 2014 at 8:55 am | Permalink

            Denis,

            If you Google under images for a look for a graph of UK money supply you’ll see it has increased linearly for the last several decades. Its the same story for Germany, and the US who have both had a better inflation record than the UK.

            The theoretical reasons why the money supply has to always increase, part of it is by the Government issuing more currency into the economy, is based on the following:

            1) the need for a growing economy to have an increased money supply.

            2) Its also based on the need to allow individuals and companies to save. For every borrower there has to be a lender and vice versa. Savers are lenders. That means that someone has to borrow it from them. If the non-government sector are net saving then the government sector has to be a net borrower. ie it recycles the savings via the sale of bonds which it then spends.

            3) The non government sector also represents overseas sellers of goods and services to Britain. Both Britain and the US generally are happy to run their trade at a deficit to the rest of the world. That deficit is effectively the rest of the world saving £ sterling treasury securities. That money is draining out of the economy as net imports are paid for. That money has to be replenished by the Govt running a deficit.

            So the Govt can’t just choose to run a balanced budget. A balanced budget is only possible if the private sector, in aggregate, choose not to net save, and also choose not to purchase more imports than they sell exports.

  13. Denis Cooper
    Posted January 26, 2014 at 1:18 pm | Permalink

    You rightly recommend prudence, JR, and I have no doubt you mean it; but as we know Gordon Brown swore that he worshipped Prudence and greatly desired to marry her, but within a few years he was abusing her and eventually turned her into a drudge slaving over a hot printing press to feed his insatiable appetite for spending money …

    There are really two contrasting ways of looking at government.

    The first school of thought holds that whoever is in government has an unlimited sovereign right to rule the rest of the people, whether that right is derived from God or from votes cast on one day every five years, and so there should be no limit on how much money the government can spend, and if it is no longer feasible to extract enough money from the rest of us in taxation and if it has seized all that it can seize then it can borrow as much as it needs to make up any shortfall, and if it runs out of willing lenders then there is the possibility of forced loans, and failing that it can simply arrange for the creation of more money to enable it to carry on spending.

    Either by the old-fashioned method of debasing the coinage, as used by the tyrant Henry VIII when he had run through all the money left to him by his father, and used up all the wealth he had seized from the church, and still needed yet more money; or by the modern method of “quantitative easing” as practised in this country so far, with the government inducing the central bank to create vast sums of new money with a few strokes on a keyboard and then indirectly pass that money to the government to fund its over-spending.

    And the advocates of unlimited government will blithely assert that really it need never repay any of the money it has borrowed, and there are no problems with it arranging for the creation of as much new money as it wants.

    Then there is the other school of thought exemplified by these words in the US Declaration of Independence:

    “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed”

    In other words the government is only there because we the people want it to be there to do certain things for our common benefit; it has no autonomous authority but only such powers as may be derived from the consent of the governed; it should be a strictly limited government and it should be kept on a short democratic leash; and therefore notwithstanding the convenient theoretical views of however so many Nobel lauretes the government should not be allowed to borrow as much as it pleases let alone create as much new money as it wants.

    • Posted January 26, 2014 at 8:55 pm | Permalink

      Denis,

      That last paragraph of yours, starting “in other words” and which is also a single sentence, is an interesting paraphrase of the US DOI.

      But I didn’t quite follow where the terms and phrases “strictly limited”, “short democratic leashes” , “Nobel Laureates “, “borrow as much as it pleases”, “create as much new money it wants” came from.

      They are definitely “other words” but the normal meaning of that term isn’t that they are “other words” entirely of your own choosing. Maybe you really meant “in completely different words”?

      • Denis Cooper
        Posted January 27, 2014 at 10:36 am | Permalink

        I said that those words in the Declaration “exemplified” the second view of government; I assumed that you would prefer the first view.

        The nit you have failed to pick is that while these are two contrasting ways of looking at government there is a third, namely that there should simply be no government at all, the opposite extreme to your view.

      • Denis Cooper
        Posted January 28, 2014 at 8:45 am | Permalink

        Comment missed for moderation here, not that it matters too much.

  14. Posted January 27, 2014 at 8:22 pm | Permalink

    Mr Redwood,

    Prudence is generally understood to be financial cautiousness. In other words playing things safe to avoid anything going wrong in future. What generally goes wrong in the UK economy is the generation of a boom followed by a bust.

    The last 3 bust/ boom cycles were the Lawson B/B (late 80′s/ early 900s), the Brown Boom (late90s/early 00s) , and the Darling B/B (2000′s up to 2008)
    The Lawson and Darling booms were housing driven. The Brown boom was more related to the share market crash at the turn of the century.

    The share market boom was more international in origin and I’m not sure I have an immediate suggestion on how that could have been prevented except by a kind of international co-operation which would be very difficult to achieve.

    Would you agree that the housing booms, which were entirely domestic, were caused by keeping interest rates too low for too long? Or do you have another theory? Is George Osborne in danger of making the same mistake now and therefore lacking prudence? If interest rates had been raised to prevent the housing booms what other economic ‘control lever’ could have relaxed to compensate for the higher rates?

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  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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