Central Bank errors can cause recessions

Last night I was privileged to give the inaugural annual Trustees lecture at the London Institute of Banking and Finance.

I used it to examine why we had large recessions in 1974-6, 1990-3 and 2007-10. In the UK we lost 4% of our output and income in 1974-6 (Labour), 1.1% in 1991-2 (Conservative) and 4.5% 2008-9 (Labour). In each case we lurched from rapid credit and money growth to a dramatic tightening of credit and money in an effort to curb past excesses. In each case two errors were made – the initial excessive credit build up, and the decision to stop it by rapid tightening.

In the 1974-6 period there was lethal inflation which reached 27%. Lots of jobs were lost but unemployment peaked at 5.5%. In 1990-2 inflation hit 10.9% but unemployment rose to a worrying 10.8%. In 2007-10 unemployment hit an unacceptable 8.1% whilst prices started to fall as the crisis intensified, such was the extent of the monetary tightening.

The 1990s crisis was entirely the result of the European Exchange Rate Mechanism. As I had written before we adopted it as policy, it was a destabilising system. We started with the markets trying to force sterling up, which meant printing lots of money and keeping rates low to stop them. This resulted in a surge of credit. Then the pound wanted to go down, so the reverse took place with a major tightening of money and credit leading to recession.

The 1970s and 2000s crises were the result of mistaken views of the Central Bank and commercial bankers that they could take more risk and lend more money without adverse consequences. This was followed by too rapid a change of tack. Today we do not yet face a similar policy induced recession, but we need to be aware that the Bank of England is tightening too much which is visibly slowing the economy. Money growth is also being slowed a bit in the USA and China.

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

79 Comments

  1. Newmania
    Posted November 22, 2018 at 6:10 am | Permalink

    You don`t think a 70% hike in the price of oil might have been a factor in the early 70s at all then? A bold and refreshing analysis ( pssst that means wrong ). Monetary Policy is still extremely stimulative . You would like to throw the kitchen sink at the economy to cover your Brexit mess up; thats all .
    Ahh..the 70s , Enoch Powell the Nations most popular politician , Tony Benn at his height , forced to eat awful British food and buy terrible British cars whilst the economy flops “plus ça change, plus c’est la même chose” as we used to say before we became barbarians

    • oldtimer
      Posted November 22, 2018 at 7:31 am | Permalink

      Think oil, think floating FX rates, think Kissinger’s deal with Saudis to pay for that oil with US Treasuries, think the rise of the petro-dollar and the massive rise of credit and you will be closer to the mark. That culminated c1982 when the US Fed rate peaked at c18% causing massive repercussions around the world.

      The big risk today is the colossal expansion of US spending and debt, still growing, and how fast the Fed raises interest rates. Markets around the world are already in retreat. Brexit is a minor side show by contrast.

      • Newmania
        Posted November 23, 2018 at 9:37 am | Permalink

        There was an actual OPEC embargo on the States and prices quadrupled during this spike
        The fact that much later , due to increased demand the Price reached not dissimilar levels is a red herring , clearly the context is inherently quite different

    • Lifelogic
      Posted November 22, 2018 at 7:42 am | Permalink

      Benn and Powell were both exactly right on how the “Common Market” would destroy UK democracy and embed the UK in the EU hole that the people now sensibly wish to escape. May is alas clearly determined to ensure we remain in this buried in this dire EU hole for ever more, and to ensure have to suffer Corbyn/SNP too.

      Alister Heath has it right as usual today:- The coup against Brexit will push voters into the arms of extremists like Corbyn.

      May must be stopped from killing Brexit with her idiotic non Brexit we surrender document. It is clearly not Brexit, it is even worse than remain and is a suicide note for the Tory Party.

      https://www.telegraph.co.uk/politics/2018/11/21/coup-against-brexit-will-push-voters-arms-extremists-like-corbyn/

    • Anonymous
      Posted November 22, 2018 at 8:46 am | Permalink

      Remain capital London has certainly turned barbaric, whilst in the EU.

    • Hope
      Posted November 22, 2018 at 10:30 am | Permalink

      The BoE is not fit for purpose as it has become political under the terrible Carney. He has failed all his own tests or predictions. Central banks failed to even recognise the last world wide crash by socialist overspending, credit and lending.

      JR, now that May and Rudd publicly expressed that they have no regard for democracy or electoral democracy, by insisting there will be no Brexit or will prevent no deal, are the public equally entitled to remove them or parliament by any and every means?

      This seems to be what they are inevitably positioning the public towards.

      The public voted to leave the EU and its single market and customs union. This was in manifestos as well. Barnier states it was May who asked to be in a customs union! The public voted to leave without any form of withdrawal agreement or trade deal.

      In May’s withdrawal agreement she agrees to pay billions of our taxes to the EU without any legal liability to do so. She lies again.

      May agrees to pay billions into the EUs EDF and refugee trust, this is on top of the overseas aid £14 billion. There is no legal liability. Why do none of you challenge her?

      Most EU fantastic now behind May’s treachery to sell out our nation as a vassal state after opting back into EU policies on the road to becoming full members again. The UK will not diverge for decades and May plan is mirroring an accession treaty.

    • Stred
      Posted November 22, 2018 at 10:42 am | Permalink

      Have you heard of the Barbet boom. Heath let the economy rip in time for the 74 election. House prices went through the roof, building materials were in short supply, building regs approval took a year and when they put the brakes on the building industry was largely out of work. The period should have been annotated Conservative/Labour.

      • Stred
        Posted November 22, 2018 at 10:43 am | Permalink

        Barber

      • libertarian
        Posted November 23, 2018 at 9:19 am | Permalink

        Stred

        Totally correct , The “Barber Boom” was the start of the huge jump in house prices, rising upto 40 % , and we’ve never recovered from that in the housing market

    • lojolondon
      Posted November 22, 2018 at 12:41 pm | Permalink

      No. Looks like you studied ‘home economics’ instead of the real thing. The oil price has gone far higher since without recession. Recessions were caused by Labour and the EU, not by commodities prices.

    • Roy Grainger
      Posted November 22, 2018 at 12:48 pm | Permalink

      At absolutely no point at all was Enoch Powell ever “the nation’s most popular politician”. You weaken your point by just making up things like that just because you WANT it to be true.

      • Newmania
        Posted November 23, 2018 at 6:32 am | Permalink

        According to Dominic Sandbrook ( The historian !) Enoch Powell polled as the Nations most popular politician for three years in a row in the early 70s .

    • libertarian
      Posted November 22, 2018 at 5:47 pm | Permalink

      Newmania

      You mean people came around to your house in the 1970’s and force fed you tripe and onions? What a totally utterly stupid statement

      Your answer to why EU is …. fancy pastries then.

      Hysterical in every sense

      • Newmania
        Posted November 23, 2018 at 9:46 am | Permalink

        No , I mean the UK was a dump before it entered the EU. Amongst the many delusions of the Brexit dreamers is that this country is inherently a free market Atlantic tiger trapped in Social Democracy by evil Germans
        The evidence is otherwise .Did you know that Thomas Cook was state owned in he early 70s ( as well as BT et al ). Sid had not yet been told.
        Half the country was unionized and a Conservative administration was trying to fix “Prices and Incomes” like some dim witted UKis-stan hell hole
        The Unions (returning to Oil) took the opportunity to bring down a government

        There has never been a time when a referendum on taxes would not ave produced a more progressive system and I could go on

        • Edward2
          Posted November 23, 2018 at 8:13 pm | Permalink

          Cured by Thatcher
          Not by the EU

        • libertarian
          Posted November 25, 2018 at 8:07 pm | Permalink

          Newmania

          Lol

          Did I know….yes you plum I lived through it. The 60’s was a brilliant decade when the world focused on the Uk, popular culture, films, fashion and music. Then came the Heath government, they busted the country then took us into the EEC !!! The energy crisis, 3 day week, power blackouts, prices and incomes fix, rubbish and bodies piling in the streets all happened AFTER WE JOINED the EC. It was only sorted out when Thatcher took over and put the country back on its feet

          Funnily enough though , I still ate in decent restaurants in the 1970’s , I still worked in France, Germany, Holland, Switzerland and USA all WITHOUT freedom of movement !

          • libertarian
            Posted November 25, 2018 at 8:11 pm | Permalink

            ps

            Newmania

            Thomas Cook was helped out by the government at the start of WW2 ( a European travel company not having much of a market during a European war) It was fully nationalised as part of British Rail in 1948. It was re privatised in 1972

    • John Hatfield
      Posted November 22, 2018 at 7:52 pm | Permalink

      Newmania, the Brexit mess is entirely due to the way it has been handled by Theresa May under the orders of her Tory sponsors aka big-business.

    • Anonymous
      Posted November 22, 2018 at 9:21 pm | Permalink

      “before we became barbarians”

      Could’ve picked umpteen times in the last forty years. Chooses the moment we chose Brexit of all of them.

  2. Mark B
    Posted November 22, 2018 at 6:17 am | Permalink

    Good morning

    We must also not forget the recession between 1979 – 1982. This was, in part, due to the UK government reducing subsidises to failing businesses, mostly state business such as steel and coal.

    The ERM fiasco was a product of Conservative Left Wing, Pro-EU faction. The same faction that is power today. In fact, it has been in power ever since John Major took over.

    The ERM was designed to be the forerunner of the EURO. Currencies would peg themselves within certain limits to the Deuchmark. The UK peg itself too high. The result was disastrous.

    Today we see the same Left Wing Tories trying to do something similar. They are trying to converge on the EURO in the hope that we will one day join. This is the aim of those in power today. Mark my words.

    • Bryan Harris
      Posted November 22, 2018 at 7:41 am | Permalink

      Good points Mark – From the support that May gets, it is clear the tory party has moved even further left…

      We should judge this failed government by it’s policies and new taxes – even corbyn has not hinted at a death tax – What will the tories introduce next, a birth tax?

    • Caterpillar
      Posted November 22, 2018 at 7:58 am | Permalink

      Mark B,

      And we see the proEU stance continue with PM May led Conservatives. Hammond may recognise the problem, Hunt notes the Turkey trap, even a Bloomberg opinion piece sees the problem https://www.bloomberg.com/amp/opinion/articles/2018-11-20/may-s-brexit-deal-has-a-fatal-defect . We have now been warned 2 years for a fully working customs system, luckily we have had two years so can presume this is in place. If anything in withdrawal agreement (customs, regulations, fishing rights,ECJ) leaves UK tied to EU after 2020, we will know we are going to be dragged into the next eu financial framework …

    • Richard1
      Posted November 22, 2018 at 10:32 am | Permalink

      The UK joined the ERM when Margaret Thatcher was PM. It was supported by such Conservative right-wingers as Nigel Lawson (in general a great chancellor & presumably now repentent on this). Also of course by the strongly pro-EU centre left, the business establishment, the CBI, most economists etc etc. As was the euro of course, though the effects of that on the UK were fortunately never tested.

    • old salt
      Posted November 22, 2018 at 11:46 am | Permalink

      Mark B
      It’s all there, and more, in the “5 presidents report”
      https://ec.europa.eu/commission/sites/beta-political/files/5-presidents-report_en.pdf

      • Mark B
        Posted November 23, 2018 at 6:24 am | Permalink

        Thanks.

        I thought the line ” Deep and meanungful” particularly sinister as that is the words she has used in the past. Clearly this is a person who knows how to convey her true thoughts, feelings and alliegencies without giving the game away.

  3. Ron Olden
    Posted November 22, 2018 at 6:46 am | Permalink

    I’m surprised that John Redwood doesn’t mention the recession of 1980/81 when output also fell around 4% and unemployment peaked at around 13% in 1982.

    The roots of all these recessions lie in the profligacy which let to the preceding boom.

    He might also like to throw in shadowing the Deutschmark from around 1986. Which amounted very much to the same thing as being in the ERM from then on.

    The Bank of England has not tightened up too much so far. It’s about right and it can easily be loosened again if necessary. Inflation however is still 2.4% That’s 0.4% above target.

    At some time however Interest Rates are bound to normalise.

    As for the Euro, had we joined it, economic catastrophe would have ensued around 2009.

  4. Caterpillar
    Posted November 22, 2018 at 6:51 am | Permalink

    Day Dalio’s recent debt crises book should be read by all.

  5. Freeborn John
    Posted November 22, 2018 at 6:53 am | Permalink

    Why isn’t your name on the lists of those who have written a letter to Graham Brady? It looks like you are prominent in keeping May in office and her terrible deal with Brussels in place.

  6. DUNCAN
    Posted November 22, 2018 at 7:02 am | Permalink

    And now we can see the damaging legacy of the arch charlatan that is John Maynard Keynes and how his ideas inculcated within politicians the belief that they have a positive purpose in economic affairs

    An economy is a human entity. It is not a machine to be turned on and off to suit the political requirements of incumbent governments.

    How very damaging and how very destructive Keynes’s ideas have been

    • libertarian
      Posted November 23, 2018 at 9:23 am | Permalink

      Duncan

      True , but we can’t entirely blame the man himself , its more the corruption that politicians and “economists” have done in his name. His actual philosophy was very narrow and involve public spending in very small bursts under very specific circumstances. Now the left just say all public spending is investment

  7. Andy
    Posted November 22, 2018 at 7:12 am | Permalink

    We do not face a policy induced recession.

    Except Brexit.

    Which will still be making my children poorer long after most of today’s ERG rangers are dead.

    • libertarian
      Posted November 23, 2018 at 9:24 am | Permalink

      Andy

      OK , just for once give us a fact or indeed an example of exactly how and why your 6 year old will be poorer

      If you can’t do that I suggest you stop posting your nonsense

    • Edward2
      Posted November 23, 2018 at 5:56 pm | Permalink

      So increasing interest rates, reducing lending, restricting the money supply and restrictions on public spending have no effect on growth.
      You obviously never studied macro economics.

  8. Everhopeful
    Posted November 22, 2018 at 7:35 am | Permalink

    We used to leave economics to the govt. in which we then trusted. Before c 1997 we were free, happy, confident and friendly. Towns had not been eviscerated and countryside was beautiful ( no wind farms,no jam packed hutch-houses). All gone now. What a mess…what a crying shame.

  9. Bryan Harris
    Posted November 22, 2018 at 7:38 am | Permalink

    The BoE has been wrong too often in recent times – Which is of little surprise, given that it’s governor has been slanting the statistics towards a failed Brexit

    I can see why May was so keen to extend the term of Carney, for he has shown himself, like the chancellor, to be a trusted EU lover that will do anything to keep us tied to the EU – They both belong in t6he same cell as May.

    It’s mainly politicians that cause banking problems – Bankers just take advantage of loopholes.

  10. Richard1
    Posted November 22, 2018 at 7:45 am | Permalink

    Sir Max Hastings, the historian, to his great credit, became the first prominent remainer I’m aware of to admit that his support for the ERM ( he was telegraph editor at the time) was a horrible mistake and also that he was wrong to accept the foreign office view at the time of Maastricht that the EC/EU were not serious about political integration. He remains a remainer but it would be good if some of these other prominent remainers such as Lord Heseltine, who are so dismissive of Brexit and it’s supporters, would also admit they were completely wrong on the ERM. And also come clean on whether they actually think the EU federal superstate which Maastricht turbo-charged is desirable, instead of pretending it’s all about supply chains and keeping the planes flying.

  11. Thames Trader
    Posted November 22, 2018 at 8:38 am | Permalink

    For the 1970s recession you would be failing in your duty by not pointing out the other major factors leading to a recession:
    – large increase in oil price as mentioned in another comment
    – three day week due to power shortages weakening company output and profits with consequent effect on investment
    – industrial unrest in many companies leading, again, to lower profits and investment

  12. George Brooks
    Posted November 22, 2018 at 8:46 am | Permalink

    As each year graduates from university it is a fraction of a degree further to the left than the year before and as more and more of them get into parliament without first making a success of a job in the big wide world of commerce we will make a bigger mess of our economy and lose influence throughout the world.

    If the PM gets her way she will cripple this country and surrender it to the EU which will take decades to rectify. Further more I hope the Conservative Remainers understand that if they think a vote for TM’s deal will secure their job they are deluded. The Party will disintegrate and they will be out of job.

  13. Lindsay McDougall
    Posted November 22, 2018 at 8:47 am | Permalink

    In all three of the cases you mention, there was a worsening fiscal position. The public expenditure spree beginning in 1972 was driven by Heath/Barber’s panic reaction to 5% unemployment. John Major’s government came to power and loosened controls on public expenditure from 1990, including the disastrous 1992 and 1993 budgets. The period 2007 to 2010 saw Gordon Brown at his worst, failing to control welfare expenditure whilst taking an axe to capital expenditure.

    So was fiscal incontinence a cause or an effect?

  14. DUNCAN
    Posted November 22, 2018 at 9:00 am | Permalink

    Carney’s a politician not a banker. He thinks like a politician and acts like a politician. His actions as Governor of the BOE are driven by political considerations not economic

    He’s just another political appointee masquerading as a banker

  15. henryS
    Posted November 22, 2018 at 9:47 am | Permalink

    Only goes to show the experts don’t know everything. We put people into high office, trusting them with politics, banking, regulatory office, business and Industry etc but they don’t really know anything more than anyone else. I suspect half of them are charlatans in these jobs for personal gain- a lot of it to do with the old boy network.

  16. Alan Joyce
    Posted November 22, 2018 at 9:49 am | Permalink

    Dear Mr. Redwood,

    May I get my apologies in first. My post is completely off-topic but I had to put pen to paper on Brexit.

    I thought the Prime Minister’s behaviour had sunk to a pretty low level but I was wrong. Yet again she proves that there is no limit to how low she will stoop. Now she threatens to cancel Brexit completely and disenfranchise the 17.4m who voted for it.

    Having thrown Northern Ireland to the wolves she now has Gibraltar in her sights in order to appease the Spanish. Fishermen beware – you are next! An independent coastal state – hah!

    What on earth are conservative mp’s thinking about? She is single-handedly destroying your re-election prospects, consigning the party to the wilderness but worse by far; turning Great Britain into a fiefdom of the European Union.

  17. acorn
    Posted November 22, 2018 at 9:51 am | Permalink

    Sadly, modern politicians are too scared to take responsibility for the economy and have no understanding of how to operate a 100% fiscal fiat currency economy. They invented central banks to take the blame for political incompetence.

    People forget that before the current incarnation of the US Federal Reserve, the US went for seventy-five years without a central bank and its monetary policies. Monetary policies haven’t increased aggregate consumer demand. Increasing household debt has been more effective but is very vulnerable to shocks.

    Fiscal policy action by monopoly currency issuing Treasuries saved the banks in 2008. President Trump is showing how to rev-up the US economy with tax cuts and increased government fiscal spending. Deliberately increasing the US federal budget deficit to 5%. Now watch as the US FED will raise economy-wide interest rates to counteract Trump’s fiscal stimulus, at the first signs of inflation.

    The UK is doing the very opposite to the US Treasury. The crazy EU “stability and growth pact” is doing even more damage to its members; they have no control over their own monetary or fiscal policy.

  18. TRP
    Posted November 22, 2018 at 10:18 am | Permalink

    “plus ca change, plus c’est la meme chose”, indeed. It is also very “encouraging” to see that revisionism is still alive and kicking. I hope we will get the text of the full speech that was given, that must have been just an aperitif.

  19. Chris
    Posted November 22, 2018 at 10:22 am | Permalink

    I believe there are highly significant lessons that we could learn from President Trump and his goal to separate the risks of the large banks’ activities (Wall Street) from those of “Main Street” so that if Wall Street banks indulge in activities that cause huge losses they will bear responsibility, and Main Street is not put out of action.

    I quote from The Conservative Tree House website article entitled:
    Multinational Wall Street -vs- Main Street U.S.A…
    “President Trump and Treasury Secretary Mnuchin have already begun assembling and delivering a new banking system.
    Instead of attempting to put Glass-Stegal regulations back into massive banking systems, the Trump administration is creating a parallel financial system of less-regulated small commercial banks, credit unions and traditional lenders who can operate to the benefit of Main Street without the burdensome regulation of the mega-banks and multinationals…”
    (The author links to the details of the parallel financial system).

    There is much more information in this lengthy article, which is quite fascinating, and to me demonstrates what an excellent brain President Trump has for solving business problems and how he chooses a team that have the expertise to deliver (contrast that with special advisers and civil servants, many of whom do not seem to have the practical and business knowledge required to solve business and trade problems).

  20. Toffeeboy
    Posted November 22, 2018 at 10:44 am | Permalink

    I’m afraid this is factually incorrect. The 1990 recession was certainly not “entirely the result” of the ERM. The US going into recession in July 1990 was the primary cause of the UK recession. The fact everyone knew the UK was set to follow the US’s lead, and therefore needed to cut interest rates, but wouldn’t be able to do so, was what prompted the run on the pound. Membership of the ERM may have exacerbated the recession, but it certainly didn’t trigger it.

  21. Know-Dice
    Posted November 22, 2018 at 10:48 am | Permalink

    Off topic [for today]

    Loads of excitement over the weekend in Brussels, but remember that the “Political Agreement” is not a legally binding agreement and the EU DO have a track record of not honouring these sorts of arrangements.

    And re: “The Back stop” if it’s not going to be used, it needs to be removed from the legally binding “Exit Agreement” and the UK certainly would need to be able to unilaterally remove itself if it [the back stop] were to be enacted at some time in the future.

  22. ian
    Posted November 22, 2018 at 10:48 am | Permalink

    A good article on Brexit Fact4eu today on, the UN global compact for safe, orderly and regular migration, this is what all parties in the UK want to sign you up to by law in or out of the EU.

  23. ian
    Posted November 22, 2018 at 11:08 am | Permalink

    Your Gov is working behind the scenes all the time to get cheap working immigrants into the country all the time for big businesses, most parties and their MPs are undermining you every step of the way.

  24. Lifelogic.
    Posted November 22, 2018 at 11:26 am | Permalink

    Your analysis is surely right.

    What is also slowing the economy is the highest taxes for 40 years, more and more costly red tape loaded on to businesses, a total lack of pro growth vision from this government, expensive renewable energy, an appalling (rationed and much delayed) health service with poor outcomes, over congested roads, lack of runways, a benefit system that augments the feckless and deters people from working, police who have largely given up ….. Above all the very real threat of Corbyn/SNP government that T May is doing her very best to bring about.

  25. Rien Huizer
    Posted November 22, 2018 at 11:40 am | Permalink

    Mr Redwood,

    In line with earlier posts, your perception of central bank responsibility is “activist”. In my opinion (a mainstream one), central banks must ensure monetary stability and as little friction as possible. Discretionary stimulus (which will rarely work as intended) is for politicians. Unfortunately, many of the disasters you mention (not all or dominantly to blame on CB policy) have to do with past governance of the BoE. Politicians should leave monetary policy to technocrats with little discretion, preferably applying a system that ressembles an automatic pilot. That is what CB independence means and underpins credibility.

    • libertarian
      Posted November 25, 2018 at 8:15 pm | Permalink

      Rien

      Actually why not just do away with central banks altogether as they no longer serve any useful purpose

  26. ian
    Posted November 22, 2018 at 11:59 am | Permalink

    1974 to 76, recession because of Joining EEA and oil, 1979 to 1982 recession, no money or anything else left because of 1974 to 1976 recession, recession 1989 to 1993, the big bang in the City Of London which lead to the housing crash and loads of businesses going bankrupt because of banks refusing to lend money with interest rates going up and the ERM which push them up to 16% in 1993 from 6% in 1989, recession 2000 to 2003 for the tech share market and housing boom on cheap interest rates and then an everything collapses in 2008 which they still try to work through after 10 years with high immigration and low interest rates. I call it, the new normal, banking and signing agreement seem to be the main problems with immigration.

  27. Chris
    Posted November 22, 2018 at 12:05 pm | Permalink

    This legal verdict on May’s deal should be required reading for ALL MPs, and in particular those Tory MPs who still support May.

    Mr Redwood, May cannot be allowed to do this to our country. She seems on the verge of finalising the imposition of her treachery on us. Please will MPs wake up and act. It really is of vital importance to the survival of our country.

    https://www.spectator.co.uk/2018/11/mays-brexit-deal-the-legal-verdict/
    May’s Brexit deal: the legal verdict
    The PM’s plan isn’t bad – it’s atrocious

  28. Peter Martin
    Posted November 22, 2018 at 12:13 pm | Permalink

    @ John,

    What you describe is always going to happen if there is an over reliance on monetary policy to control the economy. When the rate of lending is accelerating a stimulus is applied to the economy. Increased lending means increased borrowing. There’s usually no point in borrowing unless you want to do some spending and so it is the increased spending that causes the stimulus.

    But the increased lending doesn’t actually give anyone more money to spend. It simply brings forward future spending power. If we add in fees and interest charges then it actually reduces spending power in the longer term.

    So we can’t have everlasting credit acceleration. There has to be times of deceleration too and, as you point out, there is a good chance that these will bring about periods of recession.

  29. Andy
    Posted November 22, 2018 at 12:14 pm | Permalink

    The future partnership document is an interesting read.

    It is basically a list of all the great things the EU has done which the UK still wants to be a part of.

    Really Mr Redwood. Brexit is the most pointless thing ever.

    A policy to make our country poorer to appease economically illiterate xenophobic old men.

    • libertarian
      Posted November 23, 2018 at 9:29 am | Permalink

      Andy

      The Remain Troll Army posts continually highlight why you are a bunch of luddite , regressive losers

      You STILL have no idea who and why the Brexit vote happened. Remainers squeal about the same things and have done for 2.5 years , you still haven’t learned the lessons. It doesn’t surprise me as Remainers are stuck in the past, fear change and innovation and dont understand international trade

  30. Hugh Rose
    Posted November 22, 2018 at 12:57 pm | Permalink

    What the Central bank and Government needs to learn is how to control inflation WITHOUT going into recession. It is crazy to AIM for 2% inflation – inevitably it rises above that and then in panic a seesaw starts. Keynes did not understand inflation and neither do most of the modern economists.

  31. Remington Norman
    Posted November 22, 2018 at 12:58 pm | Permalink

    Hi John,

    Your analysis of the Brexit Withdrawal Agreement is thorough and persuasive. What is dismaying is that many in Cabinet and in parliamentary Tory party do not appear to understand its consequences, or to accept that the UK will receive nothing in return for any payment. If this is allowed to go through, the damage done to both country and party will be incalculable, not least in a further diminution of trust in politicians – already at an historic low. What is the party waiting for before it insists that the referendum mandate be delivered – in substance as well as in name?

  32. ian wragg
    Posted November 22, 2018 at 1:17 pm | Permalink

    No doubt Carney will be doing his best to engineer a recession if it looks like “No Deal”.
    Amber Rudd the failed business woman who inexplicably acts as outrider for May stating the government won’t allow a No Deal situation.
    is this woman completely stupid ( don’t answer that). The EU has no incentive to give us a food deal if they know we won’t walk away.
    Hunt saying the CU will become a Turkey shoot (31 years and still counting) but still they follow their Messiah.
    What a bunch of idiots there in Westminster.

  33. Bob
    Posted November 22, 2018 at 2:04 pm | Permalink

    Do you think that Mrs May lulled you into a false sense of security?
    You should have never believed a single word she said.

  34. Helen Smith
    Posted November 22, 2018 at 2:44 pm | Permalink

    And yet the very people who pushed the ERM and joining the Euro are being listened to now, and shaping the disastrous capitulation to the EU.

  35. Bob Dixon
    Posted November 22, 2018 at 3:22 pm | Permalink

    Thanks for this. I suspect that Hammond & Carney have no ulterior motive for their actions.

    Pity the Brexit debate does not consider the Treasury and Bank of England actions.

  36. ian
    Posted November 22, 2018 at 4:16 pm | Permalink

    Mrs May like Mr Cameron comes away with nothing at all, not even fishing. just something for the bankers if we are in the CU.

  37. Mick
    Posted November 22, 2018 at 4:18 pm | Permalink

    After watching the Eu negotiations statement in the HOC , can you tell us Mr Redwood if there is anybody in Westminster that doesn’t have a self interest in us staying in the Eu i.e most mps, if this deal/agreement is truly in the best interest of the UK because I’m sure I’m not the only one confused for it to be a good or bad deal

  38. Chris
    Posted November 22, 2018 at 4:51 pm | Permalink

    Merkel speaking in Berlin today makes it clear that giving up sovereignty is what should be done, and is a better form of patriotism than nationalism, according to her. This is what Tory MPs supporting the PM are voting for – there is no hiding from it now:

    https://www.express.co.uk/news/politics/1048913/brexit-news-angela-merkel-germany-eu-sovereignty-uk
    “…Speaking at an event organised by the Konrad Adenauer Foundation in Berlin today, the outgoing leader of the Christian Democratic Union argued that countries should be prepared to make concessions in an “orderly procedure”.

    She said parliaments should make the decision to sign such contracts, reports German news channel Welt…..She told the event, titled ‘Parliamentarianism Between Globalisation and National Sovereignty’:
    “In this day nation states must today – should today, I say – be ready to give up sovereignty…”

  39. Derek Henry
    Posted November 22, 2018 at 5:28 pm | Permalink

    John,

    Are you looking at rate hikes from a micro or macro perspective ?

    I don’t believe in their presumption that low rates are supportive of aggregate demand and inflation through a variety of channels, including credit, expectations, and foreign exchange channels.

    The problem with their view of the credit channel is that it relies on the assumption that lower rates encourage borrowing to spend. At a micro level this seems plausible- people will borrow more to buy houses and cars, and business will borrow more to invest. But it breaks down at the macro level. For every £ borrowed there is a £ saved, so any reduction in interest costs for borrowers corresponds to an identical reduction for savers. The only way a rate cut would result in increased borrowing to spend would be if the propensity to spend of borrowers exceeded that of savers. The economy, however, is a large net saver, as government is an equally large net payer of interest on its outstanding debt. Therefore, rate cuts directly reduce government spending and the economy’s private sector’s net interest income.

    I also don’t agree with the inflation expectations channel. This presumes that inflation is caused by inflation expectations, with those expecting higher prices to both accelerate purchases and demanding higher wages, and that lower rates will increase inflation expectations.

    First, with the currency itself a simple public monopoly, as a point of logic the price level is necessarily a function of prices paid by government when it spends (and/or collateral demanded when it lends), and not inflation expectations. And the income lost to the economy from reduced government interest payments works to reduce spending, regardless of expectations. Nor is there evidence of the collective effort required for higher expected prices to translate into higher wages. At best, organised demands for higher wages develop only well after the wage share of GDP falls.

    Lower rates are further presumed to be supportive through the foreign exchange channel, causing currency depreciation that enhances ‘competitiveness’ via lower real wage costs for exporters along with an increase in inflation expectations from consumers facing higher prices for imports.

    In addition to rejecting the inflation expectations channel, I also reject the presumption that lower rates cause currency depreciation and inflation, as does most empirical research. For example, after two decades of 0 rate policies the Yen remained problematically strong and inflation problematically low. In fact, theory and evidence points to the reverse- higher rates tend to weaken a currency and support higher levels of inflation. After 8 rate hikes in the US look at the real data.

    There is another aspect to the foreign exchange channel, interest rates, and inflation. The spot and forward price for a non perishable commodity imply all storage costs, including interest expense. Therefore, with a permanent zero-rate policy, and assuming no other storage costs, the spot price of a commodity and its price for delivery any time in the future is the same. However, if rates were, say, 10%, the price of those commodities for delivery in the future would be 10% (annualised) higher. That is, a 10% rate implies a 10% continuous increase in prices, which is the textbook definition of inflation. It is the term structure of risk free rates itself that mirrors a term structure of prices which feeds into both the costs of production as well as the ability to pre-sell at higher prices, thereby establishing, by definition, inflation.

    • Rien Huizer
      Posted November 25, 2018 at 11:17 am | Permalink

      @ Derek Henry

      Your comments are generally correct, however it is not (and I am sure Mr Carney agrees to that) possible nor legitimate for a central bank to discretionally target monetary policy, except in extraordinary circumstances. Key objective is monetary stability with as little friction as possible. In a more simple past, anchoring policy to expected real activity and accommodating that through very subtle money supply changes (usually increments) would have been enough. Of course politicians would generally not be happy with that and if their luck would be to live in a period of cyclical decile they would invoke bogus theories (like popular versions of keynesian economics) to justify their desire to buy votes, especially if budgetary space would not be kind to their attempts to buy votes. That goes for both flavours of UK politics.

      Since modern money is to complex, anchoring policy (using a variety of tools) to reliable indicators of economic activity (on a level basis) CB policy can de made largely non-discretionary and insulated from political interference. Of course, if one would subject the BoE to Treasury direction, things would be different. I have not found good research on this (still looking) but my suspicion is that BoE polocy “errors” (one should be careful to determine true causality here) are more to do with desperate politicians than incompetent bankers.

  40. Robert Cale
    Posted November 22, 2018 at 7:16 pm | Permalink

    The recent ‘Gig Economy’ jobs boom is down entirely to low interest rates and not Universal Credit as many MPs seem to think. That said the short-term gains in the job market extract a heavy cost in terms of the debasement of Sterling and the trashing of savings. The time is fast approaching when the BOE and Mr Carney will have to chose which is more important, half a million unsustainable gig jobs propped up by low rates or having a stronger currency in place to absorb the cost of imports once we leave the EU. The short-termism of the BOE is due entirely to Mark Carney, a man who has led the BOE in the wrong direction.

    • Rien Huizer
      Posted November 23, 2018 at 8:59 am | Permalink

      The gigs boom is the result of existing regulatory space meeting technological solutions that reduce the administrative burden of hiring people for very short periods and irregularly. Nothing to do with monetary policy.

      • Robert Cale
        Posted November 24, 2018 at 6:43 pm | Permalink

        Lets see if these jobs hold up once interest rates are 2% to 3% above the rate of inflation. Does Carney believes he can control inflation by having rates under the rate of inflation? Of course not hes just adopting a short term policy to hold up the jobs market. This will prove to be unsustainable.

    • libertarian
      Posted November 23, 2018 at 9:35 am | Permalink

      Robert Cale

      Wrong sorry

      The jobs boom was created by something entirely different and is nothing to do with the gig economy either which hasn’t really cut through yet in any meaningful way .

      I agree with you about Carney and the BoE ( despite me regularly presenting the data to them, I own a Jobs Market data mining and analysis business ) and politicians have no idea about the jobs market or what caused the 3 million job boom . They are trying to take credit for it though

      • Robert Cale
        Posted November 24, 2018 at 6:52 pm | Permalink

        The gig business model has a problem, it can never pay good wages out of productivity. In effect this means the state having to subsidize and defend low wages. Something that is just as bad as paying people to do nothing and creates a far higher level of dependency that regular benefits, it also hampers the amount of revenue that can be maintained through taxation. However I hold the view that once we see a return to rates that are comfortably above the rate of inflation we will see the gig economy unravel. Higher Rates are a real worry for SMEs anyway but for the tiny Nail Salons and Self-Employed they will prove to be a killer.

        • libertarian
          Posted November 25, 2018 at 8:24 pm | Permalink

          Robert Cale

          Wrong. I can introduce you today to ‘Gig” economy workers on £50 per hour plus. You just dont understand what the gig economy is. Uber drivers and deliveroo cyclists aren’t the only gig workers you know. The future is flexible work. Prof Charles Handy predicted what he called the “portfolio worker” in the 1970’s.

          Freelance, hourly paid work, different gigs and flexibility are future patterns of work. If the government stopped attacking freelancers with crap like IR35 we’d be a lot better off.

  41. Tabulazero
    Posted November 22, 2018 at 9:02 pm | Permalink

    Aren’t you happy then that Mark Carney slashed rates in the wake of the referendum despite JRM giving him a lot of stick for it.

  42. George Brooks
    Posted November 23, 2018 at 8:20 am | Permalink

    Is the first stage of ‘moderation’ handled by an AI system? If so it does not appear to like what I write. My comment for this entry is still waiting after 2 days

  43. LED
    Posted November 23, 2018 at 12:13 pm | Permalink

    The former head of the WTO told us clearly what would happen if we went for a proper Brexit, he said it would take 4-5 years to negotiate a free trade agreement like Canada but for those 4 years we would drop from the 1st division to the 4th division. So the question is simple. Do we have enough spine to say we are willing to allow big business to not do quite so well for 4-5 years in trade with Europe in return for being a fully independent nation again?

    If you say no, then big business along with the BBC and their media helpers have tricked you into believing 4-5 years of slightly worse trade arrangements for big business is worse than surrendering our nation forever, as a Franco-German vassal.

    I urge you all to show some clarity of mind here and think about what we pass on to your children, please do not think of selfish short term benefits for big business. Get a grip for Gods sakes.

  44. LED
    Posted November 23, 2018 at 12:13 pm | Permalink

    Getting our country back is not a “car crash” or a “catastrophe” it is the most glorious moment modern British history. Please can we stop this nonsense, these are words big business have put in your mouths, Britain is not just big business

  45. LED
    Posted November 23, 2018 at 1:25 pm | Permalink

    The current European Parliament proposal of Article 13 will have serious unintended consequences. It threatens to deprive millions of people in Europe of their ability to upload content to platforms like YouTube. European viewers would lose access to billions of videos from all over the world.

  • 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