Beware the cold winds from Central Banks

The Bank of England has pursued an energetic monetary tightening since the spring of 2017. Two interest rate hikes,a withdrawal of credit facilities to commercial banks and a major FPC tightening on car loans, some mortgages and consumer credit have helped slow the economy markedly. This has reinforced the fiscal squeeze,with higher taxes and a lower deficit, which is also pushing the economy into slow growth.

In the USA the government in contrast is keen to promote growth. It has done so by tax cuts for all and some state spending increases. As a result the US economy has accelerated well. This week the Chairman of the Federal Reserve Board declared war on this policy by letting us know that there will be more interest rate rises to come to brake the economy’s progress.

Markets had been expecting a shallow rate cycle, with a peak official rate of around 3%. There is no undue inflationary pressure, and wages have been going nowhere in real terms despite the low levels of unemployment. The Fed now seem to be implying they think their current rate of 2.25% is “behind the curve” or too low. Markets were duly spooked. Longer term rates rose sharply, the cost of US government borrowing went to a new high for this cycle, and stockmarkets fell.

This icy blast will be felt around the world. There has been a general tendency to higher rates and monetary tightening all year, and that will now get worse.Most at risk are the badly run emerging economies with too much dollar and other foreign debt. We have seen big currency falls in places like Turkey, Argentina and Brazil, with falls by most currencies this year against a dollar buttressed by rising rates.

Central Banks should ease up a bit. Their ruinous policies caused the boom and bust in 2005-10. They have been rightly in atonement for their bad decision to deflate their credit bubble too quickly in 2008, keeping rates low and encouraging banks to rebuild damaged balance sheets to make the system more resilient. Moving too quickly to higher rates is a destabilising move which they should avoid. There is no “normal” higher rate they have to get to.

Debt is sustainable all the time the borrowers keep their jobs and all the time the interest charges stay around current levels. Pushing rates too high too quickly undermines both these conditions for sustainability.

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86 Comments

  1. Peter Wood
    Posted October 7, 2018 at 6:01 am | Permalink

    Good Morning,

    You must look at the whole picture; the US now has a larger budget deficit and trade deficit than the last 5 years, and increasing. Is this good fiscal management?

    • Peter Wood
      Posted October 7, 2018 at 7:35 am | Permalink

      US Deficit to GDP Financial year 2018 est. 4.2%

      US Federal Debt to GDP 2018 @103%

      Sunday entertainment, the USA would not be allowed to join the Euro based on these metrics — although Greece is OK!

      • Rien Huizer
        Posted October 8, 2018 at 9:09 am | Permalink

        The US is a superpower and in a position to extract rents from its clients. The UK is not.

        • libertarian
          Posted October 8, 2018 at 9:39 am | Permalink

          Rien

          Yes but apparently the EU is a rules based organisation and you can’t cherry pick

          The UK is a superpower too , according to UN the UK is the second most influential global player

    • Richard1
      Posted October 7, 2018 at 7:59 am | Permalink

      It will be interesting to see how it develops. Growth may increase tax receipts and reduce the deficit.

    • Tintin
      Posted October 8, 2018 at 12:42 pm | Permalink

      When the USA has had to manage the world economy, it was unavoidable

  2. formula57
    Posted October 7, 2018 at 6:09 am | Permalink

    There is the discomforting view that the Fed’s enthusiasm for increasing interest rates now is to ensure that it retains the policy lever of making cuts to alleviate the next (forthcoming) recession. What the Bank of England is playing at is by no means so clear.

    • Ian wragg
      Posted October 7, 2018 at 8:55 am | Permalink

      Carney is following Osborne and engineering a recession so he can blame Brexit.
      Together with the Chancellor they have destroyed the car market and are well on the way to destroying the housing market.
      Wait for the punishment budget because we had the temerity to vote for Leave.

      • Pragmatism
        Posted October 8, 2018 at 12:44 pm | Permalink

        The Chancellor is saving us up for a recession which by his saving brings it on. And, the downfall of the government

  3. oldtimer
    Posted October 7, 2018 at 6:58 am | Permalink

    One consequence of several years of the ultra low interest rate policy of the central banks has been the emergence of so-called zombie businesses that have grown and only survive on a diet of cheap debt. These are not a sign of a healthy or strong economy; they are weak and are the early casualties of a rise in interest rates. Ultra low interest rates have been ultra bad news for savers. For them a rise is welcome.

  4. Lifelogic.
    Posted October 7, 2018 at 7:16 am | Permalink

    Indeed, in the UK misguided & daft banking regulations, slotting rules, Basel II capital requirement and similar are restricting perfectly sensible bank lending, investments, productivity improvements, business expansions and the likes. Banks currently get away with very large spreads indeed between deposit and lending rates and huge fees and restrictive terms too. Anything slightly outside set products tend to get refused.
    Property development and commercial property investment lending is particularly expensive. This is made even worse by the idiotic decision of Philip Hammond to tax landlords on “profits” they are not actually making. Thus pushing up tenants rent and thus restricting supply of properties to rent when far more properties to rent are needed.

    It is reported that the sensible wing of the Tories might vote done Hammond’s budget. Well a budget from Hammond will almost certainly be idiotic and probably should be voted down anyway.

    Meanwhile the socialist, interventionist, robotic dope and electoral liability Theresa May is moving even further to the left! She is surely to the left of Ed Milliband now. Perhaps sounding a bit left wing and “nice & kind” can occasionally win some lefty votes but certainly do not actually do it. Tax, borrow, over regulate, bloated government and pissing tax payer’s money down the drain in the May/Hammond mode hugely damages growth. kills jobs and the harms economy hugely.

    How can you point out what harm a Corbyn/Mc Donnall government would do if you yourself are aping it yourself Theresa? Why on earth did you join the Tories with such idiotic, left wing, government knows best views?

  5. Lifelogic.
    Posted October 7, 2018 at 7:29 am | Permalink

    Peter Oborne yesterday says it is come to his knowledge that if May is defeated in the commons over Brexit she will not quit but call a general election!

    With the appalling robotic, liability Theresa still as leader and tax to death Hammond we would quite likely get Corbyn/Mc Donnall/SNP. Perhaps in just a few weeks he suggests.

    What an horrific thought.

    Reply And how would she have the power to do that? And why would she still b e Leader if she had attempted to get through a vision of Brexit strongly opposed by a good number of Conservative MPs?

    • Ian wragg
      Posted October 7, 2018 at 1:29 pm | Permalink

      She seems to have the power to do just what she wants.
      She’s getting ready to sign up to keeping us in the Customs Union on a semi permanently basis.

      Reply She will need primary legislation passed by Parliament to confirm any deal she would like to sign.

    • Richard1
      Posted October 7, 2018 at 2:31 pm | Permalink

      I don’t know when the right time is but at some point the Tories will need to re-air the hoary old phrase “no change no chance”

      • libertarian
        Posted October 7, 2018 at 7:11 pm | Permalink

        Richard1

        Way too late now. We all know beyond doubt that the Tory party is Blairite Socialism . They are busted. Luckily for them there is no credible opposition , which is making a totally mockery of our so called democracy.

        What they just dont see is that it opens the door for a potential extremist take over . The lack of competence amongst our political is unbelievable

    • Lifelogic.
      Posted October 7, 2018 at 2:33 pm | Permalink

      To reply: I do very much hope you are right and that the sound wing can stop her total lunacy. But they failed to stop the appalling John Major or replace him and he predictably took the party over the cliff for very many terms. It certainly seems that she is positioning herself to try to ram through Chequers minus, minus. minus (with some new name). This against the will of most her party members and the people by using some Labour support.

      Back me or I will call an election (and will might get Corbyn/Mc Donnall/SNP) seems to be her strategy. Why else is she adopting Ed Milliband policies?

      The way for the Tories to win elections (as Lady Thatcher showed in spades) is lower taxes, smaller government, efficient government and economic competence.

      Hammond and May are clearly the complete opposite and are clearly ratting on Brexit.

      • Alison
        Posted October 8, 2018 at 8:35 am | Permalink

        I think Mrs May and her team think ‘back me or get Corbyn’ also works for quite a few MPs in the Labour party. The government whips are approaching Labour MPs to push through what Mrs May and Mr Robbins want, but they are emboldened to do so by the extremely frightening situation in the Labour party.
        I think Nicola Sturgeon is also extremely aware of the strong areas of her negotiating position. I think Mrs May will make offers to ‘Wee Nippy’, who will push for, and get, a lot more. Then the SNP will vote with Mrs May on Chequers.

    • mancunius
      Posted October 7, 2018 at 4:32 pm | Permalink

      Lifelogic – According the Fixed Term Parliaments Act she would need a 2/3 majority to do that. The last time, Tory MPs thought they could helpfully increase the Tory majority (unaware that Mrs May was going to produce a manifesto that would deter Tory voters). This time, they have a lot more doubt about TM. And while many Labour members might well be keen to have another go at election roulette, few Tory MPs would want to risk the electoral destruction of the Conservative Party, by backing another general election with such a leader.

      • Lifelogic
        Posted October 8, 2018 at 5:46 pm | Permalink

        I hope you are right as robotic, dim, socialist May is a huge electoral liabiliy.

  6. Steve
    Posted October 7, 2018 at 7:30 am | Permalink

    JR

    Your last paragraph has caught my attention. You say debt is sustainable while borrowers keep their jobs.

    For an ever increasing number of people debt is unsustainable despite them being in employment. Debt is actually a major player in the break up of families, domestic violence.

    In my opinion uncontrolled usury is the culprit. It is banned in some cultures and countries.

    Consumerism and usury are closely linked, and society seems to have abandoned the practice of waiting until one can afford it. All too often people wishing to enhance their lifestyle fall into the trap, rather than waiting and working towards.

    An example of ensnaring people into usury that springs to mind is a TV advert where a mum is in a rush to do the school run and get to work, and her kids announce that the boiler is on the blink again.

    She doesn’t have the money for a new boiler and so takes the credit being advertised. All problems solved and life will be so much better in a few hours time. The problem here is the usury ; in this example something in the region of (a high rate ed). etc ed

    Do you not think that we could build a better and self reliant society if usury was banned ?

    Would you agree that the wellbeing of society could be enhanced if we emphasised Personal Economics in the schools national curriculum ?

    If we are teaching the young not to touch smoking because it is bad for one’s wellbeing, then perhaps we should also teach them not to live by must have it now ethics, and also educate the future generations on how to manage their finances better.

    My bet is; if you ask the average young person what usury is they probably never heard of it. Therein lies the problem.

    Reply How would you define usury? No, I want to live in an advanced society where young people can borrow money to buy homes, cars etc. Of course firms rightly have to explain the cost of the debts, and it would be good to teach children how to evaluate costs and claims.

    • Steve
      Posted October 7, 2018 at 2:53 pm | Permalink

      JR
      Thank you for taking the time to reply.

      To answer your question; Usury is defined as unreasonable interest, not zero interest.

      For example (if ed) the TV advertised 1,300% and above, aimed at people lacking the knowledge to evaluate the risks.

      Would you or I have a credit card with 1,300% interest rate? not a chance.

      No one sensible would touch this kind of rate with a bargepole, but I do think the problem here is a lack of education which is being exploited.

      Debt elimination must be a priority, and I think the way to achieve such is by proper schooling. Personal Economics should be on the curriculum, in my opinion.

      Again thanks for your reply.

  7. ColinD.
    Posted October 7, 2018 at 7:36 am | Permalink

    Why should the Bank of England advocate a target inflation rate so much higher than the bank rate. This has gone on for a decade, rewarding debtors and cheating savers. Where is the incentive to save when there is never a real return on saving accounts? There is something immoral about this policy.

  8. fedupsoutherner
    Posted October 7, 2018 at 7:39 am | Permalink

    What an absolute joke! You have May standing up at her conference going on about the end of austerity and then you tell us this John. We all know where higher interest rates lead us. Down the road to hell eventually. I’m just glad I don’t have a mortgage anymore. I lived through high interest rates once and it destroyed us as a family. Many businesses went bust and people lost their homes. It was not a happy time. Still, at least the government and all parliamentarians can blame Brexit this time. I give up with politics and I have lost all hope with this government and democracy.

    • Alan Jutson
      Posted October 7, 2018 at 4:08 pm | Permalink

      fedupsoutherner.

      She will not end Austerity because there has not been a real Austerity programme, yes department and Local Authority funds have been squeezed, but not by a lot.

      It was the Financial crisis which lead to job losses and lower wages.

      She will need to up the spending on the NHS and the Police at least, because the population has increased and so demand has been greater.

      Social care is still in a dire state but nothing yet outlined to fix it, the so called extra money is peanuts compared to what is really required.

      Higher tax take is most probably been caused by a higher number of people now working, stealth taxes and fiscal drag on all allowances, not by a Chancellor being clever with policies or rapid growth.

    • mancunius
      Posted October 7, 2018 at 4:42 pm | Permalink

      It’s curious, isn’t it, that when we had to pay 17% mortgage rates in 1992, before we exited currency union, you heard very few people blaming or even discussing the ERM, or Maastricht, or EU monetary policies. It was all just a confused jumble of misunderstood causes, with painful effects. Press coverage was confused.
      At least we now know a lot more than we did.

  9. Duncan
    Posted October 7, 2018 at 8:19 am | Permalink

    I’m more concerned about the anti-libertarian instincts of your leader of my party rather than the politicised behaviour of central bankers

    I can protect my financial and economic interests against the ignorance and stupidity of the western political class (governments and their central bank allies) but I am powerless to protect my personal freedoms and liberties form being eroded and removed by politicians in government who have decided that liberty and freedom must be sacrificed on the altar of identity politics and social engineering

    The rise of ‘liberal’ left fascism is a far bigger danger to us all than the actions of Powell, Carney and Draghi combined

    • piglet
      Posted October 7, 2018 at 1:23 pm | Permalink

      The rise of ‘liberal’ left fascism is a far bigger danger to us all than the actions of Powell, Carney and Draghi combined

      I quite agree. Without freedom and free speech our lives are not our own. How ironic that the ‘liberal’ left frequently talk up the merits of ‘tolerance’ – a human quality that they are actively seeking to destroy.

  10. Lifelogic
    Posted October 7, 2018 at 8:20 am | Permalink

    More “no nation socialism” from the idiot and electoral liability that is Theresa May today in the Observer (does anyone still buy this paper?). Who will rid us of this appalling woman?

    https://www.theguardian.com/commentisfree/2018/oct/06/theresa-may-labour-voters-look-again-tory-party

    I had missed in the Tory chairman Brandon Lewis’s dreadful speach at conference his wet, pathetic uttering of the gender-neutral term “our fellow countrypeople” – what a tedious lefty plonker the man is. Slightly better than Cameron’s choice of Baroness Warsi I suppose is the best one can say of him.

    • Duyfken
      Posted October 7, 2018 at 11:59 am | Permalink

      You never fail to amuse me, whilst also agreeing with your sentiments!

    • mancunius
      Posted October 7, 2018 at 4:48 pm | Permalink

      And of course the word ‘countrypeople’ is a deliberate circumlocution for the usual word ‘compatriots’ – as many are the determined opponents of patriotism, and others are patriots for and of other nations.
      Countrypeople indeed. Makes the Tory Party sound like The Archers.

  11. Mark B
    Posted October 7, 2018 at 8:26 am | Permalink

    Good morning.

    One could argue that the Central Banks are acting in a manner that demonstrates their independence from political interference. Something that the UK lacks 😉

    When governments spend more but do not tax more, they have to borrow. This borrowing does need to be checked otherwise you end up in a Venezuela type situation which we all know full well that our kind host does not support.

    We need to be careful when creating both artificial inflation and deflation as governments can cause great damage to the private sector of the economy, leaving the state sector untouched and still bloated and inefficient, which in turn acts as a drag to recovery.

    The Central Banks were not the main cause of the financial crisis. Here in the UK the Financial Regulatory body which the government created to oversee the banks did not do its job due to political interference. The banks played fast and loose can created a new South Sea Bubble using derivatives. The mistake made was not to let the banks go bust, pay the savers back their monies and start over again. Instead the government socialised the losses and privatised the profits, effectively rewarding them for their failure. And we are still paying for this today with scandalously low interest rates on savings and high rates on borrowing.

    In short. We need to gt back to where we were before all this started. Unfortunately that is going to take a long time.

    Reply The Central Banks were to blame, and they defended the errors of commercial banks vigorously. I do agree – and argued at the time – that shareholders and bondholders in banks brought down by the crisis should have lost their money at risk.

    • Dennis
      Posted October 7, 2018 at 11:53 am | Permalink

      Reply to reply – JR, did you hear Gordon Brown explaining everything on Radio 4 at 8pm on this Saturday? What do think of his talk? Did he do well?

      • mancunius
        Posted October 7, 2018 at 4:50 pm | Permalink

        B-b-ut Dennis, he ‘saved the world’! We simply can’t and shouldn’t judge our Saviour in human terms. 😉

    • Mark B
      Posted October 7, 2018 at 5:41 pm | Permalink

      Reply to reply.

      The Financial Regulatory Authority was responsible not the BoE.

      The FSA was set up by the government under Labour.

  12. Michael O'Sullivan
    Posted October 7, 2018 at 8:40 am | Permalink

    The US economy is like a runaway train with the driver gone looking for the restroom-
    Please Please don’t wish us along that road- what we need is better stability in our lives and more certainty with moderate growth so that we can sleep peacefully at night, not more borrowing, open the purse strings mad stuff, increase bankers bonuses and allow everything to career off not knowing where it will end- we had all of that ten years ago!

  13. hans christian ivers
    Posted October 7, 2018 at 8:53 am | Permalink

    The Fed is worried by the spiralling debt of the Federal government, which is growing at twice the rate before the Trump tax cuts and the forecast for the future deficit does not look very rosy.

  14. Denis Cooper
    Posted October 7, 2018 at 9:02 am | Permalink

    Off-topic, as usual the Sunday Telegraph cannot help but get it a bit wrong, because the most important proposal here is not that foreign customs officers could be based in the UK, and vice versa, as part of continuing close c0-operation, but that:

    https://www.telegraph.co.uk/news/2018/10/06/brexiteers-offer-may-lifeline-will-see-eu-officials-based-uk/

    “The MPs, including Iain Duncan Smith, the former Tory leader, and Jacob Rees-Mogg, the ERG chairman, also suggest that they would support the Government enforcing EU rules on goods exported to the bloc by firms in this country.”

    It all boils down to law and the effective enforcement of law: at present while the UK is part of the EU we have UK laws implementing EU laws to control what is permitted to enter our territory – so, for example, no US-style “chlorinated chicken” allowed in – and equally after we had left the EU we could have UK laws to control what was permitted to leave our territory to enter the EU – so even if in the future we decided to allow US-style “chlorinated chicken” into the UK, including into Northern Ireland, we could pass and enforce a UK law to prevent it being driven across the Irish land border into the Irish Republic and potentially therefore the rest of the EU.

    As stated in a letter recently published in the Irish Times, which inexplicably seemed to cause a certain degree of offence among some readers:

    http://johnredwoodsdiary.com/2018/09/21/the-eu-is-more-preoccupied-with-migration-than-with-brexit/#comment-962198

    “The legitimate interests of the EU and its Irish satrapy do not extend beyond the nature of the goods circulating in its own EU Single Market, and it is gross impudence on the part of the EU to presume that it should be able to continue to control goods permitted in the United Kingdom once we have freed ourselves from the EU, any more than the EU can expect to control goods permitted in the United States or other “third countries””

    Reply I was not consulted on this statement and will talk to them about it tomorrow.

    • Denis Cooper
      Posted October 7, 2018 at 10:23 am | Permalink

      I almost fell off my chair laughing this morning when I saw a rather nervous Irish Deputy Prime Minister Simon Coveney solemnly telling Sophie Ridge that both sides in the Brexit negotiations needed to show “flexibility”.

      Just to recall what his colleague Helen McEntee, their Europe Minister, told Sky News on November 24th 2017:

      http://johnredwoodsdiary.com/2018/06/08/how-to-put-some-strength-into-the-uk-negotiation-of-brexit/#comment-939439

      “We have been very very clear from day one, there cannot be a physical border and that means ruling out cameras, that means ruling out technology, that means ruling out anything that would imply a border on the island of Ireland, it is not an option for us”.

      Note this was not just “ruling out reinstatement of customs posts at the border”, the false impression conveyed by many media reports, it was

      “ruling out anything that would imply a border on the island of Ireland”.

      And then there was Simon Coveney himself on Sky expressly rejecting even the use of drones at the border, how would they interfere with the flow of traffic?

      http://johnredwoodsdiary.com/2018/05/13/technology-at-the-border/#comment-934809

      The basic point is that for the sake of Ireland’s national economic interests the Irish government wants to keep the whole of the UK under all the rules of both the EU Customs Union and the EU Single Market, as indeed does our own pro-EU Prime Minister who will therefore welcome any pretext to do that.

      • Jack
        Posted October 7, 2018 at 4:00 pm | Permalink

        Denis ..correct..now you understand..the Irish are not going to allow a hard border of any sort to be reestablished.. so at the first sight of drones they will be shot down .. best thing to do is have goods that need inspecting by the EU to be routed through Dublin, inspected, and then driven up over the border. In that way it doesn’t matter if they come south again, they will have already been inspected. So no hard border required and no border in the Irish Sea

        • forthurst
          Posted October 7, 2018 at 7:30 pm | Permalink

          There needs to be an agreement on what may be transported over the land border with everything else being routed via a port where there are customs. Very little crosses the land border so it is simply a case of maintaining the status quo more or less.

        • Denis Cooper
          Posted October 8, 2018 at 8:21 am | Permalink

          Jack

          Read what Helen McEntee said: it is not a question of a hard border or a soft border, the pretence of the Irish government is that there is no border and they reject “anything that would imply a border”.

          I see that straight away you are invoking the threat of violence.

          I am not willing to see the UK kept under even partial EU rule to dissuade Irish criminals from violence, and the Irish government should not be relying on that threat to get its way over the future treaty arrangements between the UK and the EU.

      • notachance
        Posted October 7, 2018 at 4:55 pm | Permalink

        Well you can fall off your chair anyway you like but Englands days of drawing borders in other peoples countries is finished..so suck it up

        • Denis Cooper
          Posted October 8, 2018 at 8:25 am | Permalink

          The border is there, drawn by agreement between two sovereign states, the UK and the Irish Republic, so you suck that up.

  15. Andy
    Posted October 7, 2018 at 9:39 am | Permalink

    Central bankers didn’t cause the 2007/8 crash. (Though he failed to spot the worst financial crisis for 50 years, Brexiteer BoE Governor at the time Mervyn King can not be blamed for corrupt banking practices). Rather the responsibility falls on politicians on both sides of the Atlantic who, for years, complained banking was too heavily regulated and who repeatedly legislated to take those safeguards away.

    What failed in 2007/8 is the theory that unchecked capitalism is a force only for good. What we learned is that, free from regulatory restraint, a small unsavoury element will push boundaries beyond acceptable limits. It starts with blurred lines and, before long, ends in behaviour that we now know is sometimes criminal. We failed to learn the lessons of the 1920s of the risks posed to us all by unchecked capitalism. History repeated.

    This is why Brexit is so harmful to young people. Dr Fox, Mr Rees-Mogg and others like to talk about ‘deregulation’. By that they mean they want unchecked capitalism. Sensible regulation which protects workers, consumers, the environment, safety is what they want to slash. Frankenstein foods may be cheaper. But they may also be more harmful for you and your children. Dr Fox doesn’t not care. He wants you to eat them. Because American diets have worked out so well for Americans.

    The Brexiteers want to do all this to make themselves and their rich friends richer at your expense. The consequences are inevitable. Someone will be a victim of their race to the bottom. It won’t be them – but it may be any of you. Letting them slash sensible safety regulations to save their wealthy buddies a few pence will not look so smart if the impact on you is negative. And on some of you it will be.

    Reply Why then did this crash in the UK occur under a UK Labour government, led by a man said to be a financial expert and long term Chancellor prior to being PM? Why did it happen some years after Labour had revamped and beefed up regulation, with a special banking regulator to regulate individual banks as well as the Bank of England having systemic risk duties? Are you ever interested in the truth of anything?

    • Andy
      Posted October 7, 2018 at 12:13 pm | Permalink

      It occurred because the global financial system is deeply – some would say dangerously – interlinked. And George W Bush – a Republican – was asleep on the job. He allowed a bring American bank to fail, bringing the whole house of cards crashing down in one almighty right-wing mess.

      Mr Brown and Mr Darling took what limited steps they could to protect us from this global conservative financial tsunami but it was the brilliant Mr Obama who ultimately put things right again. Rarely before has a recession so deep ended without a significant conflict involving the great powers.

      It always takes a political moderate to fix the damage of dangerous ideologues. Mr Obama sorted out Mr Bush’s mess. Mr Macron is sorting out Mr Hollande’s. Mr Blair sorted out Mrs Thatcher’s.

      I see Mrs May is trying to appeal to ‘moderates’. I chortle and wonder if any of these Tories ever speak to younger people?

      Reply The oil crisis recession of the early 1970s did not lead to a global war. Mr Brown had to deal with his own mess. He had inherited an economy that was performing well, with a state sector in surplus and limited national debt.

      • Edward2
        Posted October 7, 2018 at 4:29 pm | Permalink

        Obama did nothing.

    • libertarian
      Posted October 7, 2018 at 12:52 pm | Permalink

      Andy

      As your analysis of the banking crash is totally, utterly laughably wrong, we will also place your predictions about Brexit in the same category

      I’m waiting to find out a subject you know anything about. Remind us what your ( pretend) business does again

      • NickC
        Posted October 7, 2018 at 3:00 pm | Permalink

        Libertarian, Andy seems to be working under the delusion that we will be tempted to sell out our country for 40 pieces of silver. There is no other explanation for his oft repeated guess that we will all be poorer because of Brexit.

    • Richard1
      Posted October 7, 2018 at 2:39 pm | Permalink

      The banking sector was not lightly regulated. it was – then and now -more regulated than every other sector of the economy maybe except for pharmaceuticals. But they didn’t regulate the only thing that really mattered – bank leverage. That’s because there wasn’t a free market operating (who would put their money in a company 50x leveraged unless they thought there was an implicit or explicit backstop?). Note also the Eurozone banking sector remains in far worse shape than the more financialised and free market US banking sector.

    • Steve
      Posted October 7, 2018 at 3:30 pm | Permalink

      Andy

      ‘History repeated.”

      If you understood anything of history you’d know why people voted for brexit, which was not to piss people like yourself off as you so frequently claim.

      “The Brexiteers want to do all this to make themselves and their rich friends richer at your expense.”

      Where the hell do you get that from?

      “….they want unchecked capitalism. Sensible regulation which protects workers….”

      Personally I don’t care what my boss makes from his company, I do not care what SUV he drives, as long as I am paid a reasonable wage for my services sufficient to maintain the wellbeing and security of my family he can make as much profit as he likes as far as I’m concerned. It’s his business not mine and I don’t have a problem with that.

      I don’t know what explains your fixation with others being better off than you, and your perception of being proper shafted by everyone who voted leave, but whatever it is it is unhealthy.

      We did not vote leave just to knacker you my friend.

      To be honest doing so would not even justify the effort of picking up the ballot paper.

  16. hans christian ivers
    Posted October 7, 2018 at 10:22 am | Permalink

    Good Morning

    A very interesting perspective.
    The economy has slowed now doubt about that, with GDP growth of 1.2% , just over a third of its rate in 2014 and early 2015. Growth in the fist half of the year was its slowest for six years. The interesting thing about the slowdown is that it is more or less in line with the majority of economists, about the probable short term consequences of Brexit, which is that Britain’s GDP would be about 3% or roughly £ 60bn, lower by 2020 as a result. (SOurce George Buckley , from Nomura)

    Reply The slowdown did not start after the vote, but after the Spring 2017 budget and spring 2017 monetary tightening, so it is clearly not caused by Brexit.

    • hans christian ivers
      Posted October 7, 2018 at 1:16 pm | Permalink

      John

      Thank you for your reply most commentators, economists and the facts seem to contradict you conclusions, but that is what the debate is for of course as we went from the fastest to the slowest G8 economy in terms of growth . Please note I used the word probable, but I do disagree with your final sentence.

      • NickC
        Posted October 7, 2018 at 2:53 pm | Permalink

        Hans, Selecting very short periods for comparisons conveys little real information. You are just engaging in vituperative politics. Come back in 20 years so we can compare your EU with our UK over at least one economic cycle. That makes far more sense than your pissing contest over a few quarters, especially as we have not even left the EU yet.

        • hans christian ivers
          Posted October 7, 2018 at 9:31 pm | Permalink

          NickC.

          I was actually looking back to wne we had the potential at growing at 3% a year before the vote. We grew more than the rest of Europe before for a long time whilst still being members of the EU. So , thank you for that contribution very helpful

  17. NickC
    Posted October 7, 2018 at 10:24 am | Permalink

    I suspect that ECB policy is a lot more destabilising than the actions of the BoE and the US Fed at the moment. Not only is there the horrendous Target2 imbalances (effectively subsidies), but the ECB is curtailing its QE program and hence its sovereign debt purchasing splurge.

    Consequently Italy looks to be the most vulnerable EZ state, needing a profligate purchaser of last resort. Unfortunately Italy, being trapped in the Euro, must either crash out or submit. Of course the EU loves to engineer submission by bending the rules. So Italian submission it is then. And, though the Euro will survive, there will be financial turmoil because of it.

    • Rien Huizer
      Posted October 7, 2018 at 7:41 pm | Permalink

      All Italy will have to do is to accept the discipline of the market. And maybe figure out how government works.

      • Prigger
        Posted October 8, 2018 at 12:41 pm | Permalink

        It works for Italians. They vote for what they wish. Little government

  18. Rien Huizer
    Posted October 7, 2018 at 10:35 am | Permalink

    Mr Redwood,

    Allow me to examine your argument a little:
    – CB “tightening” “slowed” the economy. The BoE is not tightening, it is slowly raising interest rates back to more normal levels (for a normal level, the simplest recipe is still the Taylor Rule nand that rule -with UK output close to potential as indicated by very l;ow unemployment even in the presence of a large temporary labour migrant population- indicates something nearer to 4% than the medium policy objective of just 2.5%.
    – “slowed the economy” You are stating causality where mere correlation exists. It is quite likely that measures that simply result from macro-prudential regulation introduced after the financial crisis, have tightened certain consumer budget constraints. These constraints are still quite weak, compared with many other European countries, for instance even with the country that has the highest level of housing debt/capita in the EU, Netherlands. Dutch supervised banks would say stop long before a British bank would, under the current regime (in LTV terms) . That is a matter of prudential regulation (ie to protect the State from bank failure consequences), not business cycle management.
    – As there appears to be little slack in the UK economy (imo the main reason why there is no room for stimulus and combined with low productivity a good reason to be happy with current results rather than disappointed; it could have been much worse) your recent suggestions re fiscal amd monetary policy must imply a rather large increase in labour immigration, especially in areas like construction, infrastructure projects and health care. However, your political base wants lower migration, not more.

    Why are you writing these recommendations. Do you want to blame the BoE. Do you want to blame the Treasurer? Would you like the political independence of the BoE reduced? Would you want to relax the constraints on banks introduced after the crisis?

    Reply You do not seem to understand monetary policy. Higher rates, stricter credit rules, fewer facilities for commercial banks is a monetary tightening, a deliberate policy choice. The Bank has itself said it has succeeded in halving the rate of money growth. I ask Why? I want the Bank and Treasury to follow policies which promote more UK growth without undue inflationary pressures, and there is no evidence of undue domestic inflationary pressures as the Bank has to confirm. The Bank is not independent, as I have often explained. It is wholly owned by the state and o9ften given new guidelines or frameworks by Parliament and the government.

    • hans christian ivers
      Posted October 7, 2018 at 2:07 pm | Permalink

      John,

      I think the remark “you do not seem to understand monetary policy” to Rien huizer is a bit steep, thinking of your interpretation of the QE debt of the BoE not being a problem and therefore our government debt is only 67%, this is a misinterpretation of the BoE debt and would if it was forgiven have a major impact on the value of the pound in the market. (We are not the US)

      Reply The US is busily demonstrating that QE purchased bonds can just be run off with the government owning both sides of the transaction.

      • hans christian ivers
        Posted October 7, 2018 at 3:01 pm | Permalink

        we are not the US with a global currency

      • Den
        Posted October 7, 2018 at 5:48 pm | Permalink

        If QE is debt is not a problem why has it been stopped? Ordinary Debt is only not problem once it has been paid off.
        QE is plain old counterfeiting which results in the devaluation of a currency. That means for a net importer prices rise causing increased inflation and subsequent rate rises and the good old consumer picks up the tab and takes the punishment, again.
        Pumping money back into the markets to revive them was tried back in early 1929. That did a lot of good did it not?
        I am sure deja vu time is not far off. October 29th 1929 a very Black day.

    • Rien Huizer
      Posted October 7, 2018 at 7:36 pm | Permalink

      Mr Redwood,

      You are the host here so I do not want to disagree when you suspect (“you do not seem”) me to not understand monetary policy. The host is always right. In the future I may need to demonstrate my expertise better. Nevertheless I hope my remarks about your remarks (you mentioned interest rates, not money supply and not the form of money supply either) are well understood. Some of the policies you criticize are meant to be macro prudential and are designed to contribute to monetary stability. If their unintended consequence is an unneccesary tightening (a controversial subject among monetary policy experts) that is a matter for possible compensatory measures.

      As to central bank independence, I hope your remarks do not reflect Party policy and are not meant to undermine the BoE’s policy credibility. The UK may need all the BoE credibility it can get pretty soon, if talks in Brussels fail to produce a constructive result.

      • libertarian
        Posted October 8, 2018 at 9:45 am | Permalink

        Rien

        You have an opinion, not expertise. No one has expertise about the future, it hasn’t happened yet .

        • Rien Huizer
          Posted October 8, 2018 at 4:27 pm | Permalink

          Did I claim to know the future?

          • libertarian
            Posted October 9, 2018 at 8:12 am | Permalink

            Rien

            Yes, often

  19. Pete Else
    Posted October 7, 2018 at 10:47 am | Permalink

    Central planning didn’t work for communism, it doesn’t work here. Central banks plan for their interests not ours.

    • Rien Huizer
      Posted October 8, 2018 at 9:12 am | Permalink

      Why not look up what a Central Bank does. It is the monetary foundation of a free market economy.

      • libertarian
        Posted October 8, 2018 at 9:50 am | Permalink

        Rien

        Except that the fundamental point about a central bank such as the Bank of England is that its a lender of last resort, a function that the BoE failed to deliver leading up to the 2007/8 crash .

        Just so you know , we had a free market economy long before a central bank

        A bit of history for you

        A financial crisis known as the Panic of 1907 was headed off by a private conglomerate led by J. P. Morgan, who set themselves up as “lenders of last resort” to banks in trouble. This effort succeeded in stopping the panic, and led to calls for a Federal agency to do the same thing.

        In response to this, the Federal Reserve System was created by the Federal Reserve Act of December 23, 1913,

        • Rien Huizer
          Posted October 8, 2018 at 4:24 pm | Permalink

          Thank you,
          You could have referred to Friedman & Schwatz’s A Monetary History of the United States or Krooss&Blyn’s A History of Financial Intermediaries, both dealing mainly with US developments of course.

          I did not say that central banks precede the development of market economies, that would be nonsense. But in modern open market economies, central banks perform an essential function. Not that they always do it well or that they never respond to political influence. As to the 2007 situation, I believe that lack of quality supervision (the case of RBS for instance) contributed most to UK domestic propagation of the shockwave from the US (caused by a questionable policy re Bear Stearns and Lehman) . But that supervision was (at that time) not in BoE territory. And given that you have a banking background, would you lend to an entity on its way to insolvency like RBS with an acquisition for cash underwritten by Merrill who (had their own difficulties ed)Bagehot’s principle was that last resort lending for liquidity problems was OK, but not for solvency. One can criticize the BoE over the past fifty years but that has more to do with political influence than technocratic capacity. Maybe you find that disappointing.

          • libertarian
            Posted October 9, 2018 at 8:16 am | Permalink

            Rien

            I was thinking more of Northern Rocks request for £90 million from the BoE that was turned down. You are right this was a wholly political decision and THAT is why central banks aren’t important to free markets, because they are manipulated by politics

            On the question of RBS, If the BoE & regulator were doing their job properly they wouldn’t have allowed RBS to get in the state it did !

  20. John S
    Posted October 7, 2018 at 11:24 am | Permalink

    Low interests are not good for the whole of the economy. Savers, who are averse to risk, are getting a risible rate from the banks. Also it is killing pension funds who have to have a minimum exposure to non-share investments.

    • mancunius
      Posted October 7, 2018 at 5:10 pm | Permalink

      Good point: I’m thinking of the way the BoE pension fund itself abandoned most of its healthy equities and bonds in favour of inflation index-linked gilts (this was when Mervyn King was still governor). It was said at the time they were forced to do this.
      The INX ETF has trodden water since August 2016, and shows a Real Yield (i.e. the yield adjusted for inflation) of -1.48%!

  21. ian
    Posted October 7, 2018 at 12:47 pm | Permalink

    Not worried about gov bond, banks have free printing presses and insurance companies will buy along with big companies and the elite, not forgetting other countries who can afford to do so, the central bank will give them the heads up when to start buying for a good profit, then the gov can release more bond for the people to pay for which is known as a bailout, that so they won’t release they bond they have bought all at once.

    In the meantime, gov will open more food banks along with cuts in budgets and of cos taxes up with interest rate cuts, same old same old, with the elite ending up owning 55% of the world instead of 50%.

    They call it capitalism i call it socialism for the elite, gel should get some mileage out of this, for his bid for the leader of the country, the next time they try it it will not work, it will start off alright and then fail big time why not, most people will not have the where with all to buy goods or you could say nobody at the bottom which keeps growing will have any money to buy.
    Offshoring to the east to make goods cheaper to make companies and the elite rich quick has failed the people of the UK, their houses might be full up with crap from the east which they do not use but as you know it has to make it way to a landfill site one day and they are running out of room, this on top of a policy of millions of more people coming to live in the country, all to make the elite richer, Pollution is now the word of the day, how to stop pollution, take the peoples money away and give them food banks and recycling shops while the elite carry on their merry way.
    Here we go round the mulberry bush the mulberry bush the mulberry bush.
    Here go round the mulberry bush on a cold and frosty morning.

    CATCH 22.

  22. ian
    Posted October 7, 2018 at 3:01 pm | Permalink

    Voters never learn, they will continue to vote themselves into the poor house with the help of the media, lemming over the cliff, most poor people do not vote because they know it bad for their health and people who prefer capitalism i mean real capitalism do not vote, only the thickest of thick vote and only vote for parties.
    There been a pick up in voting over the last 17 years which only means to me that more people are getting thicker, i put that down to more people going to uni and coming out thicker than they went in.
    All the voters are wasting their time voting for parties, they do the same thing over and over to try to vote themselves into paradise but after each election, they complain that things are worse than before, of cos, parties are controlled by the idealism of many factions inside a party who are fighting it out for control of that party because they know people only vote for parties, one of the factions inside of the party wins and then the loses battle away inside the party to water down wining factions policies and you end up with mish-mash of nothingness and then the country and people slip down the hole a little bit more when new rules come that was not in the manifesto which leads to people complain that it is worse than before.
    Happy voting, on yours, ways to the first depression in over 90 years which started in 2000 while the parties and factions within the parties fighting it out with the bankers and elite having controlling interest.

  23. Dauber
    Posted October 7, 2018 at 5:06 pm | Permalink

    I loved Banksy’s painting go down for auction. Sheer…poetry?

  24. Den
    Posted October 7, 2018 at 5:12 pm | Permalink

    Despite what some might otherwise believe, Central Bank Interest Rates usually FOLLOW the Market. The Yield on a 2 Year Bond is a good guide. For the UK it is 0.84% and for the USA it is 2.89%. The BoE Rate is 0.75% and USA 2.25%. Both lagging “Market rates”. So the Fed Boss is quite right ‘they are behind the curve’.
    In a normal world, Government bonds would be bought mainly by Institutions, Funds and others from the Private sector. However, since the implementation of QE (originally designed in Japan for a short term intervention in a credit starved market) Banks have taken over more than too many allocations in the past decade. Their actions raised Bond prices, lowered Yields, thus Increasing debt and of course, lowering those interest rates to 300 year old levels. Easy money.
    Soon the mass of creditors will come to realise that, with rising Yields, their bond holdings are devaluing and will sell them off to avoid losses. This causes further slides in bond prices and therefore increasing their yields and ultimately Interest Rates. The snowball starts rolling and topples the first domino.
    This, I believe, will precipitate a global collapse in the financial markets as credit facilities seize up and debt collecting increases with rising rates.
    Those countries who have high Debt to GDP ratios and have to import their energy resources will certainly suffer.
    Us Brits will suffer but not half as badly as the EU.
    Let us hope that we are completely shod of them(Leave means Leave) before they can legitimately call on us to bail out their decrepit Brussels cabal.

    • hans christian ivers
      Posted October 7, 2018 at 9:34 pm | Permalink

      Den

      There are 27 members of the EU and at least half of them are in a better financial state than we are, so what exactly are you comparing with?

      • Den
        Posted October 8, 2018 at 3:59 pm | Permalink

        Define “Better financial state”. Then check the GDP and unemployment figures. And explain who these EU members are. BTW the EU and the Euro have not done much for Greece Italy and Spain have they? Why is that?

        • hans christian ivers
          Posted October 9, 2018 at 8:44 am | Permalink

          Denmark, Sweden, Germany, Austria, Lux, Holland and soon

  25. Lindsay McDougall
    Posted October 7, 2018 at 6:40 pm | Permalink

    There is nothing wrong in pushing base rate to 0.5% above anticipated inflation; indeed, this should have been started as early as 2012. It’s all the other interference in market decisions about which sectors should receive loans and which shouldn’t that is wrong. Why is the car industry being singled out?

    One of the main drivers of another financial bubble and eventual burst is banks being allowed to lend money they haven’t got. Bank assets in cash or in readily liquidised holdings should be a minimum % of a bank’s total loan book. The Bank of England should specify that minimum and otherwise not interfere.

    On fiscal policy, we shouldn’t be deceived by this ‘borrowing to invest’ nonsense peddled by Labour and the wet wing of the Tory party. Most of us invest in order to make a financial return, i.e. a profit, on our investments. Where is the financial return on ‘investments’ in HS2, Heathrow expansion and the NHS? It isn’t; they are all lemons.
    Sir John Armitt, a Government infrastructure guru, has said that an additional £43 billion needs to be invested in spur rails from Hs2 stations in order to make HS2 work. That money should have been included in the original cost estimate for HS2. Heathrow expansion is justified because Heathrow is a hub airport. How much profit is to be made from people sitting in a transit lounge for a couple of hours? And since when has the NHS, designed on free-at-the-point-of-consumption, die-on the-waiting-list principles, ever been profitable?

  26. Ron Olden
    Posted October 7, 2018 at 9:54 pm | Permalink

    Doesn’t the fact that the inflation rate rose last month, and is still above target, astronomic house prices which are STILL rising (albeit slowly) , a labour market which is so tight that we are still attracting large numbers of migrants at every level of skill and earnings, suggest that monetary policy has been to loose rather than too tight?

    Interest rates are still freakishly low, and we still have a large budget deficit at time when there’s barely any slack left in the economy.

    Typical returns on UK bank deposits today are well below the rate of inflation, so we are paying banks for the privilege of lending them money. It’s the same with typical Gilt Yields, where we are paying the Government to borrow from us.

    Is it too much in these circumstances to suggest that Base Rate might be increased to 1%, which will still be by far the lowest level, for all but ten years in the Bank of England’s entire History since 1694?

    This addiction by borrowers to subsidised cash, has to stop. If anyone can’t survive with Base Rate of 1% they deserve to go bust.

    The only real cause for worry is if house prices start falling by much and threaten the banks’ and individuals solvency. If that happens then policy will have to be relaxed.

    But if Banks start going bust again in economic conditions as favourable as the are now with such low interest rates, that’s their problem.

    If they do, Nationalise them, without any compensation to their shareholders. Print money to recapitalise them, Then sell them again.

  27. CHRISTOPHER HOUSTON
    Posted October 8, 2018 at 2:13 am | Permalink

    Watson, Tom: says today he wants Deputy Leaders to have a formal Debate too pre-election, sloppy seconds?

  28. no no no
    Posted October 8, 2018 at 2:17 am | Permalink

    Oh go on then. Master-

  29. Russell Verbeek
    Posted October 8, 2018 at 8:35 am | Permalink

    You have much criticism of central banks which implies you believe the Governor to be a partisan appointment and working to a partisan agenda even if it means hurting our economy.

    Similar perhaps to the Supreme Court appointments in the US.

    I know you won’t like this next bit but why was there a rearrangement of the Bank of England structure in 1967? It had already been nationalised and there has been no explanation I can find that explains what the previous Government did wrong with its initial nationalisation that would necessitate a change.

    While Wikipedia lists The Fed and the 12 regional reserve banks as public and privately owned the BoE is listed as fully national. Can you tell us about how it’s owned, influenced etc? Please consider your personal frustration at how the BBC withholds facts and consider I feel thta way about politicians and the BoE!

    Because you often critique the BBC for withholding key facts I believe you instinctively understand that withholding information is dishonourable and does a huge disservice to our nation and it’s democratic system.

    Thanks for all your insights which have been invaluable.

    Reply I have been critical of successive Governors for their policies. The Bank has made a series of very bad judgements, mainly to do with its enthusiasm for all things EU and Euro. The Bank has always been wholly owned by the taxpayers during my lifetime, and has been subject to regular changes of mission and governing law through decisions of governments and Parliament. The vogue for so called independence has been a more recent phenomenon, but as the record shows it has not been the reality, with many more changes of powers and requirements imposed by Parliament/government.

  30. Dennis
    Posted October 8, 2018 at 11:09 am | Permalink

    Growth is the food of climate change – now what will we do?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. 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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