The Bank of England gets it wrong again

The Monetary Policy Committee is struggling. It perseveres with an out of date notion of national capacity, thinks it can judge where we are against it, and then threatens us with interest rate rises and more monetary tightening if it thinks we are at or near capacity. They have been saying for some time that we will get too close to capacity within the next two years and that therefore they need to tighten money to avoid too large an increase in wages and prices. They point towards a further 25bp rate rise after the two so far since the low point.

This month they accept that they have slowed the economy more than their previous forecast, and they accept we may stay below their idea of capacity going forward. Despite this they say they want to tighten consumer credit more, and think the next change in rates will be upwards. This comes at a time of world slowdown, with a nasty manufacturing recession on the continent and elsewhere. The Fed, the ECB and the Chinese Central Bank are all talking of relaxation or additional stimulus owing to the world slowdown and car industry meltdown.

The old Bank of England  forecast said they wanted “an ongoing tightening of  monetary policy over the forecast period”. The slightly lower forecast of growth this time round makes that less clear. Core inflation was just 1.7% in May, below the symmetric 2% target. They have halved the rate of consumer credit growth since 2016 by FPC action, hitting car loans hard and now wanting to curb credit card debt more as well. They now say 2019 growth could be ” a little below its potential” yet want to do nothing to correct that.

It appears the Bank is out of step with the rest of the world and the reality of the world economy and markets. The Bank says it stands ready to move rates either way in the event of a kind of Brexit it does not expect. None of this is quantified or precise and seems to be another case of the Bank adopting a stance from a pro Remain standpoint, like all those wildly too pessimistic forecasts it made for 2016 – 18 prior to the referendum vote.

UK capacity is augmented daily by big imports of things we cannot make or grow for ourselves, and our workforce is constantly being increased by inward migration. The Bank’s forecasting model needs to take better account of that. Many in the markets do not  believe the UK can hike rates when the rest of the advanced world is going the other way. The Fed had a row with the market view that rates had to come down late last year, and lost.

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

108 Comments

  1. Ian wragg
    Posted June 22, 2019 at 5:23 am | Permalink

    They have to prove Brexit is a disaster. Everything they do is to this end.

    • NickC
      Posted June 22, 2019 at 6:42 pm | Permalink

      Ian Wragg, Yes the establishment is attempting to create a “Brexit” disaster to fulfil their own twisted predictions. It’s potty when you think about it – because the Remain position is based on their assumption that the UK is incapable of being as independent as New Zealand is.

  2. Lifelogic
    Posted June 22, 2019 at 5:42 am | Permalink

    Indeed I have not bothered to do perfectly sensible UK property development, due to the high bank margins/fees and complexity of obtaining satisfactory development or investment finance. This mainly due to misguided rules and red tape that the banks have to comply with. While base rates are fairly low the bank margins, terms and fees are excessive and lending terms are restrictive.

    Developments that I used to be able to do with say £500K of my money and £1M from the bank now need more like £1M from myself and £500k from the bank. So I can only do half as many of them hitting jobs and property supply.

    The bank is indeed absurdly pro remain and has been talking down the economy endlessly. Hammond and Carney need to go as soon as possible and take their totally wrong headed thinking with them.

    Hammond makes much of having “sorted out the public finances” but he has done this by over taxing the productive sector and the wealthy, deterring investment and pushing business and assets overseas. Many of his taxes are effectively levied are over 100% so it is hardly a sustainable plan you cannot keep robbing people. He should have been fixing the public finances by cutting out government waste, encouraging more people to use private health and education. Giving people freedom and choice as to how they spend their own money.

    We need cheap on demand energy, cut and simplify taxes, relax the money supply, cut out the endless government waste and vanity projects and have a bonfire or red tape. It is hardly rocket science. It always works as we see in the US.

    • NickC
      Posted June 22, 2019 at 6:53 pm | Permalink

      Lifelogic, The irony is that Hammond could have been a better Chancellor by encouraging us to expeditiously exit from the EU. We would have saved not only the £10-12bn cash, but also saved a lot more by reducing EU red tape, by enabling clearer simpler national government, and by better allocation of resources, thereby reducing our lost opportunity costs.

  3. Lifelogic
    Posted June 22, 2019 at 5:48 am | Permalink

    They should stop all subsides for renewables and electric cars. When these products work, are practical and become economic (without any subsidy) people will buy them without subsidy. There is no point in rolling them out prematurely using subsidies from other tax payers. HS2 is the first obvious think to cull.

    • David Jones
      Posted June 22, 2019 at 9:23 am | Permalink

      Your (Lifelogic) simple, straightforward comments about subsidies & HS2 are absolutely spot-on. Any MP sharing your logic gets my vote

      • Lifelogic
        Posted June 22, 2019 at 1:42 pm | Permalink

        I am not against R&D in these areas, but rolling out premature technology before it really works is pointless, damaging and a waste of very large sums of tax payers money.

        • Lifelogic
          Posted June 22, 2019 at 1:49 pm | Permalink

          Much talk of some new hydrogen train. So we burn gas (about the cheapest on demand electricity) and 50% of the energy is wasted, then we use the electricity to produce hydrogen and circa another 50% is wasted. Plus we have storage issues and very large handling costs for the hydrogen. So 75% of the energy is wasted before it even get to the train then perhaps another 30% on the train – what on earth is green about that. Worse than a train run on gas or diesel or electricity.

          At least with the first two the waste heat can be used to heat the train.

  4. Bryan Harris
    Posted June 22, 2019 at 5:52 am | Permalink

    How much of this is professional planning, and how much comes from a Chancellor following the EU way and imposing his thoughts on the BoE – Yes we know the BoE is supposed to be independent, but we also know how closely the BoE governor consults with the chancellor.

    Remainer politics is clearly behind attempts by the BoE to stifle growth, when we really could do with some to put a little extra in the pockets of working people.

    Will Boris, if elected, be able to remedy this – Perhaps, but only if he kicks out all remainers from the cabinet and puts a Thatcherite in control of the economy

  5. Dominic
    Posted June 22, 2019 at 6:00 am | Permalink

    This pro-EU body is deliberately planting a small bomb that may go off when we leave the EU and then the MPC can blame Brexit should our economy falter on leaving.

    We are seeing the laying off these traps by both May and Hammond as they prepare to depart into the wilderness

    It is despicable they should try and frustrate and tarnish the future of this nation for personal political ends. May with her cretinous climate change legacy and Hammond with his deliberate damaging of our economy to blame Brexit uncertainty

    Appalling individuals, truly appalling.

    Johnson, if he does become PM, must take no prisoners. There is revenge to be had. He must ignore and throw into the bin every single cynically constructed spending commitment made by May and Hammond

    • margaret howard
      Posted June 22, 2019 at 11:24 am | Permalink

      Dominic

      “Johnson, if he does become PM, must take no prisoners. There is revenge to be had.”

      Oh the irony of it all! In view of today’s headlines revenge comes too late -:)

      • Edward2
        Posted June 23, 2019 at 12:20 am | Permalink

        This is the same Guardian that screamed blue murder over tabloids that listened in to recorded mobile phone messages and now publishes the words of a private conversation as a recording made through a wall.
        The hypocrisy is huge.

    • Lifelogic
      Posted June 22, 2019 at 5:43 pm | Permalink

      “Appalling individuals, truly appalling”

      Indeed.

  6. cryingoutloud
    Posted June 22, 2019 at 6:02 am | Permalink

    Why don’t you hold yer whist until after 31st Oct- see how things go?

    • The PrangWizard
      Posted June 22, 2019 at 3:54 pm | Permalink

      Thanks for the reminder of the expression, have not heard it in decades! My mother would say that to me when I was boy, but I remember it more as ‘whisht’. This was in the north east of England but I always assumed it originated in Scotland.

      Apologies to Sir John for the departure.

      • Prigger
        Posted June 22, 2019 at 7:17 pm | Permalink

        It’s not my fault people used to say ‘keep your powder dry’ as ‘”Shush for now, hold on, you may not have to say anything to achieve your objective as things are afoot.”
        Classic scholars beware, man at work!

  7. Andrea Wood
    Posted June 22, 2019 at 6:08 am | Permalink

    Dear John

    A propos of nothing I warned you not to back Boris. I said he is a buffoon and an electoral liability and today’s headlines will be the first of many ‘slip ups’. Boris is like a bull in a china shop and will simple all of his supporters. He will not be our saviour but the catalyst to a swift end. I wish you’d listened

    Reply I did listen,but the voices I heard were for Boris more than any other candidate

    • Know-Dice
      Posted June 22, 2019 at 8:40 am | Permalink

      It’s worth noting that the “nabour” made a recording of the incident in the Johnson household and passed it to the Guardian – how convenient or could it of come from the Security service?

      Are there “dark” forces trying to bring Boris down?

      • Know-Dice
        Posted June 22, 2019 at 1:02 pm | Permalink

        Try again neighbour 🙁

      • NickC
        Posted June 22, 2019 at 7:12 pm | Permalink

        Know-Dice, Yes it was obviously politically motivated. Yes, it was designed to bring Boris down. A neighbour listening in and then snitching to the Guardian is a bit like being in the GDR. What a nasty piece of work he must be.

        I was a reluctant endorser of Boris, though the reluctance was not due to any of the puritanical charges of clowning. It was the issue of trust over Brexit – May has poisoned the well, and now I don’t trust any of them.

    • sm
      Posted June 22, 2019 at 8:40 am | Permalink

      Andrea – I am not a fan of Mr Johnson, but how conveniently timed that ‘domestic occurrence’ was yesterday! And what did the delightful neighbour do after recording one woman’s voice? Sent the recording to The Guardian….it really doesn’t seem pre-planned, does it?

      • hefner
        Posted June 22, 2019 at 2:51 pm | Permalink

        If one has got the proper app on their phone, one can do the recording and redirecting to any welcoming website in a matter of minutes. Brilliant technology!

        • Robert mcdonald
          Posted June 22, 2019 at 6:47 pm | Permalink

          Even through solid brick walls as are obviously the norm in that street.

    • Lulu
      Posted June 22, 2019 at 8:48 am | Permalink

      If. as you say, you took advice from the majority telling you to back Boris, why do you not also listen to the majority in the Wokingham constituency who voted Remain?

      Reply Because I accepted the UK majority who voted Leave in the referendum and gained a majority of votes in 2017 on a Leave Manifesto!

      • Know-Dice
        Posted June 22, 2019 at 4:51 pm | Permalink

        Lulu

        Wokingham was lumped together with Maidenhead, so how do you know that Wokingham on its own voted remain?

      • Lulu
        Posted June 22, 2019 at 8:41 pm | Permalink

        Is that the majority who were, as we know, lied to by the likes of Boris Jonson?

        • Fed up with the bull
          Posted June 23, 2019 at 7:46 am | Permalink

          Lulu. How were they lied to? It is plain to see that the remain side did more lying. All the projections have come to nothing. I’m looking forward to my holiday in Croatia. Oh yes, the planes are still flying.

    • Shirley
      Posted June 22, 2019 at 10:01 am | Permalink

      So who do you recommend? Some imaginary Tory? Boris is the best of a bad lot!

    • Stred
      Posted June 22, 2019 at 10:36 am | Permalink

      Apparently, it wasn’t Boris breaking the China.

      • rose
        Posted June 22, 2019 at 3:24 pm | Permalink

        After gruelling time, exhausted bloke spills red wine on sofa; equally exhausted bird goes ballistic (cardinal sin: red wine cannot be got out). Bloke tries to kiss and make up; bird still ballistic.

        Thanks to Stasi next door, this banal trivia ends up on the front pages of nearly all the papers and gets spewed out by the broadcasters all day.
        What have we come to? This is supposed to be “scrutiny” and “debate”.

        • Lifelogic
          Posted June 22, 2019 at 5:46 pm | Permalink

          Indeed or the other silly story about the MP using what seems to be entirely reasonable force to prevent and evict an intruder doing potential harm at a private dinner.

    • rose
      Posted June 22, 2019 at 11:17 am | Permalink

      What the media do to Boris they would not do to anyone else, if only for fear of being sued. It has become established that it is open season on Boris: they can say or do anything. Can you imagine anyone else being bugged at home through the wall from the next door flat and the trivial results appearing selectively edited on all the front pages? Or in any other country? Try to be objective and separate the propaganda from the history. For example, can you think of one thing Mr Hunt has achieved as Foreign Secretary? Apart from having the MSM on his side in order to create a favourable contrast with Boris?

      You should be asking why is this one man so persecuted? Why the lies and misrepresentations? If they believed half of what they say about him then why are they so frightened of him? Who is afraid of a buffoon? And do you think all this would be going on if Raab were the other candidate? No, Raab would be getting it instead, because the MSM regard him, rightly or wrongly, as the greater enemy.

    • margaret howard
      Posted June 22, 2019 at 11:29 am | Permalink

      Reply to reply

      Well you shouldn’t have listened to these voices. In my opinion the man’s past actions told us all we needed to know about his character (or rather lack of it).

      • rose
        Posted June 22, 2019 at 3:30 pm | Permalink

        The lack of character is on the part of the people who bug and defame.

        • margaret howard
          Posted June 22, 2019 at 11:55 pm | Permalink

          rose

          Not the old ‘shoot the messenger’ syndrome again.

          Those who ‘bug and defame’ in this case don’t aim to become prime minister of this country.

          • Fed up with the bull
            Posted June 23, 2019 at 7:48 am | Permalink

            Stred, as we all know, it’s a woman thing!

          • Fed up with the bull
            Posted June 23, 2019 at 7:50 am | Permalink

            MH. And your point is? It doesn’t stop him becoming a great PM. Clinton managed perfectly well at the White House. Nobody is whiter than white and everyone, everyone, is entitled to a personal life. Get it? Personal.

    • Jagman84
      Posted June 22, 2019 at 11:49 am | Permalink

      I suspect that you have been overdosing on the BBC ‘news’ output.

      • cornishstu
        Posted June 22, 2019 at 2:15 pm | Permalink

        Yes the BBC scoff, denigrade and have a dig at Boris at every opportunity even on local radio.

    • libertarian
      Posted June 22, 2019 at 1:36 pm | Permalink

      Andrea Wood , Margaret Howard

      yeh because no other politician has ever had a row with their partner, no other politician has ever been divorced , no other politician has ever had an affair… oh wait ( by the way I dont see any of you highlighting the obvious character and moral flaws in our EU leaders )

      Bloody hell you people are so detached from reality

      Is Boris going to be a great PM? of course not, are the media hunting him down like Trump, yes of course they are ( by the way no one seemed fazed when Kay Burley grabbed a woman protester by the throat live on camera ) Is Boris the only candidate currently that might pull off what the voters voted for? Hopefully and thats about as good as it gets until the revolution comes

      • hans christian ivers
        Posted June 22, 2019 at 5:34 pm | Permalink

        Libertarian

        Great note thank you

      • NickC
        Posted June 22, 2019 at 7:22 pm | Permalink

        Libertarian, Well said. My sympathy is with Boris – the person wronged by a nasty, prurient, spiteful neighbour. And I am disgusted by the demented Remain media whose vindictiveness and hostility seems to be boundless.

        • hans christian ivers
          Posted June 23, 2019 at 11:13 am | Permalink

          NickC

          Yes , and Boris was so good , reliable and probably the best foreign secretary we have ever had????

    • Lifelogic
      Posted June 22, 2019 at 2:00 pm | Permalink

      We certainly do not want the Theresa May – the Nightmare continues (the sequel) with Jeremy Hunt who thought May’s putrid W/A £39 billion handcuffs was just fine! That would certainly give us Corbyn/SNP and kill the Tory Party.

      Hunt is the man who presided over the dire state monopoly NHS for five years. It has killed hundreds of thousands through endless negligence, incompetence, delays, criminal actions by staff and gross neglect and yet he did almost nothing but endlessly apologise for it. True he is a bit brighter and rather less robotic than T May but no way thanks very much. Even Boris foolishly voted for it once!

      • Steve
        Posted June 22, 2019 at 10:59 pm | Permalink

        LL

        Hunt cannot hide the fact that he is a remainer, despite going before the cameras and making out he’d keep no deal as an option.

        I certainly don’t trust him.

    • Simeon
      Posted June 22, 2019 at 8:02 pm | Permalink

      Sir John,

      We couldn’t expect you to do anything else at this point than to defend your vote for Johnson. However, I’m sure you could come up with sobering better than that you took advice, Johnson was the suggested choice, and you dutifully acted as a cipher for this opinion. I would hope that it was your advice that others were seeking! You must know all there is to know about Boris, and more importantly, be capable of soundly interpreting this data. Perhaps you could give us at least some insight into how you arrived at the decision to back Johnson?

      It seems to me that your enthusiasm for Johnson is, shall we say, not as great as others. (If it were, I think many of your posters would be reconsidering the value of hearing your views.) I understand that the range of candidates on offer was hugely underwhelming. That you have opted for Johnson as the least of all evils would be defensible – not that you could put it in these terms! But still, something more than, “Johnson was the popular choice, and who am I to question” would begin to do yourself justice.

      And to finish, one last question; why was it that a proper Brexit candidate was not put forward by those of you untainted by voting for the WA? Of course Baker, Patel, or even yourself, would have had little to no chance of being endorsed by enough of your colleagues to get to the membership vote. But would there not have been real value in having a representative in the C4, and possibly even BBC debates? I accept that neither of these platforms were perfect, but they did at least provide an opportunity to express a clear and coherent Brexit position. Even for the principle of having a quality candidate to vote for, surely it would have been worth a proper Brexiter standing?

      • Mark B
        Posted June 23, 2019 at 6:28 am | Permalink

        I agree.

      • Steve
        Posted June 23, 2019 at 8:17 am | Permalink

        Simon

        A proper brexit candidate was put forward, Ms McVey. But she was eliminated for being pro English.

        Don’t blame Mr Redwood, the problem is those doing the knifing by secret ballot.

  8. Mark B
    Posted June 22, 2019 at 6:13 am | Permalink

    Good morning – again

    They have been saying for some time that we will get too close to capacity within the next two years . . .

    Yes, yes ! But do they know what this weeks Lottery numbers will be ?

    /sarc.

    Interest rates will continue to rise as there is still demand for property, mostly in the S.E. of England. And whilst I would not like the slowing down of the economy, I do not believe that the growth that we have been experiencing is sustainable. I want a government that will get State spending under control, reduce corporation tax for small businesses, you know, the ones that create jobs and wealth in the UK, and get our debt actually down.

  9. J Bush
    Posted June 22, 2019 at 6:17 am | Permalink

    Why is Carney still in situ? All he is doing is setting the foundation to ensure when we leave the EU, our economic legs and arms are tied.

    He needs to go and yesterday and a patriotic Brit put in place. One who will blow Carney’s destructive policies up and replace them with sane and logical policies, designed to aid the British economy and its peoples, not destroy them.

  10. Lucas
    Posted June 22, 2019 at 6:25 am | Permalink

    Am afraid the BoE is more concerned with Brexit outlook and not so mindful of world growth just at this time

  11. acorn
    Posted June 22, 2019 at 6:41 am | Permalink

    No worries JR, I will put money on Gerard Lyons being Boris’s pick for BoE governor. Confirmed Brexiter and supply sider. Also, Liz Truss yet another supply sider, for Chancellor.

    Unfortunately, supply side economics doesn’t work, Reaganomics proved that. The idea that cutting taxes generates more tax revenue, that allows more tax cuts was and still is nonsense. For every dollar Reagan cut taxes, he only got 35cents back. Tricle down from the getting ever richer 1%, never happened. The 99 % were the big losers.

    • Edward2
      Posted June 22, 2019 at 4:16 pm | Permalink

      Real per capita disposable income increased by nearly 20% 82 to 89.
      The poverty rate reduced every year 84 to 89 reducing by one sixth from its peak.
      The Reagan recovery grew into a 25 year boom with the net worth of all USA households and businesses growing from 25 trillion dollars in 1980 yo 57 trillion dollars in 2007.
      I realise acorn you have a biased political view of rReaganomics but it worked better than your Obamanomics did.

      • acorn
        Posted June 22, 2019 at 5:12 pm | Permalink

        The Reagan federal budget in 1981 was $0.997 trillion by 1989 it was $2.857 trillion. He increased defense budget and expanded Medicare creating the highest deficits since wartime.

        Reaganomics’ reduced taxes – slashed top income bracket rate from 70% – 28% but this failed to stimulate the economy and left the US government underfunded in supply-side terms; recession followed and unemployment rate rose 6% – 10% as rising interest rates triggered the down turn. Under Reagan, national debt increased by $1.8 trillion and debt-to-GDP ratio increased from 30% to 49%.

        Giving tax cuts to the 1% elite does not stimulate the demand-side of the economy, they don’t spend it. Nothing trickles down to the middle and lower income classes who would spend most of their post tax income.

        • Edward2
          Posted June 22, 2019 at 10:27 pm | Permalink

          Make your mind up acorn.
          You say deficits are no problem because governments can create money and debt is an illusion now you criticise the Reagan years for spending.
          He didn’t just give tax cuts to the 1% elite, get your facts right.

      • hefner
        Posted June 22, 2019 at 7:27 pm | Permalink

        Well, all your numbers correspond to annual averages of respectively 2.5%, 3.0%, 3.1%, not negligible specially compared to what is happening these days, but certainly needing to be put into context. Don’t you think so?

        • Edward2
          Posted June 22, 2019 at 10:29 pm | Permalink

          No I don’t.
          Acorn claimed the Reagon years were bad for all Americans except the top 1%.
          My figures show he is wrong.

          • hefner
            Posted June 23, 2019 at 7:54 am | Permalink

            It is clear you don’t/can’t do context. How lucky the true believers are.

          • Edward2
            Posted June 23, 2019 at 10:01 am | Permalink

            If you want to put it into context then feel free to do so.

  12. George Brooks
    Posted June 22, 2019 at 6:49 am | Permalink

    Carney’s vision does not go beyond the end of this year when he returns to Canada

    When the Chancellor asked Carney to extend his time at the B o E he thought that Chequers would be passed by the H o C and we would still be in the EU all but name.

    Carney is towing the line so as to not put a question mark over his CV and is unlikely to make any changes especially as his boss is more than likely to lose his job before the summer is out

  13. Everhopeful
    Posted June 22, 2019 at 7:03 am | Permalink

    But surely everyone is aware that the B o E is pursuing its own political agenda?
    (Don’t all globalists hate independent currencies?)
    And that seems to be aimed at keeping us in the EU by “proving” how damaging Brexit is/will be.
    Why would anyone have a bank dictating government policy anyway?
    Easiest thing in the world to make dire “no growth” predictions and then MAKE SURE THEY HAPPEN!
    I could very accurately predict my tomato harvest with a can of weed killer in my hand!

    • Mitchel
      Posted June 22, 2019 at 2:27 pm | Permalink

      “Why would anyone have a bank dictating government policy anyway?”

      Because that is what has been planned since the end of WWII-global governance by bankers-you need a world government monopoly to keep the fake money show on the road.The Soviets and their bloc refused to join in,hence you got the Cold War(you don’t really believe it was about “communism”do you?!).Recently I was reading a speech made at the UN in 1949 by Andrey Vyshinsky,Soviet Foreign Minister (succeeding Molotov),predicting what would happen if the Anglo-American bloc got their way and rejecting participation in the Marshall Plan.It is eerily prescient.

      • miami.mode
        Posted June 22, 2019 at 6:55 pm | Permalink

        Notable that in the eurozone it is obligatory for central banks to be independent of governments thus giving the ECB complete control, hence the current EU conflict with Italy and their minibots.

      • NickC
        Posted June 22, 2019 at 7:32 pm | Permalink

        Mitchell, The cold war couldn’t have had anything to do with the soviet socialists fomenting wars and revolutions to take over the world, could it? You think Poland chose to be occupied by Russia? Your extremist marxist conspiracy theories would have been regarded as loony even in the 1970s – that decade of loony socialism.

    • Al
      Posted June 22, 2019 at 7:52 pm | Permalink

      “(Don’t all globalists hate independent currencies?)”

      I was somewhat amused when researching an article to learn that a certain UK bank which provides the banking services, security, and accounts for an international Bitcoin exchange closes the bank accounts of any UK customers that use that same exchange. I don’t think that indicates faith in their product, or their customers.

  14. Everhopeful
    Posted June 22, 2019 at 7:10 am | Permalink

    I do so hope that the Boris thing doesn’t run and run
    What utter,utter NONSENSE!
    I think however that were I in this race I would not be at any known address.
    Yes..I believe it is as bad as that!
    Brexiteers are too unwary and NICE and fair and bending over backwards and terrified of being thought nasty.
    It has become existential. Too late for kid gloves.

  15. Lifelogic
    Posted June 22, 2019 at 7:11 am | Permalink

    What is the view of the UK government over the attempted Hong Kong UK/China treaty abuse by China? Why has no one in government said anything? Where do Boris & Hunt stand on this issue?

  16. Newmnaia
    Posted June 22, 2019 at 7:26 am | Permalink

    Presumably the commentary on interest rates is aimed at people who don`t know anything. I am not one of them so I shall leave you to it.
    Anyhoo did anyone spot the NOTHING where the defence of albino Bunter’s Article 24 wibble was supposed to be … Found out you were outright wrong did you; thought you would? Bit of shame for the people whose jobs will be affected but I doubt ‘Sir John Redwood’ loses any sleep about that.

    • Richard1
      Posted June 22, 2019 at 1:26 pm | Permalink

      Not really. Anyone can read gatt article 24 & it seems to be clear that if the UK and EU agree negotiation of an FTA with some timetable they will be able to continue tariff free trade. And logic dictates that’s the way it would be. Of course the EU might say no, we will only discuss an FTA with the UK after they’ve given us a bung, committed indefinitely to be in the CU etc as set out in the wa. But that will be their choice. We will have to focus our efforts on FTAs with countries, as happens around the world outside the EU. Perhaps one day the EU will come back and say ok maybe it would be better to have an FTA with the UK.

      Meanwhile I suppose we can assume at least that the EU will stop complaining about Trumps tariffs, having itself started a voluntary trade war with an allied liberal democracy! (As they are also doing in a little noticed development against Switzerland as they try to force that Country against its will into EU political structures).

    • libertarian
      Posted June 22, 2019 at 1:41 pm | Permalink

      Newmania

      AND STILL you are unable to provide a shred of evidence or an example of why people will lose their jobs specifically because of Brexit

      You really dont know much about anything . Hows your insurance no deal planning coming along? Let me know when you want me to fix it for you

  17. Lindsay McDougall
    Posted June 22, 2019 at 7:27 am | Permalink

    We can buck the world trend if it’s in our interest to do so. Sanity is something you can enjoy by yourself.

    Issue 1: Why is 2% inflation better than zero inflation? I keep asking that question and I keep getting no answer.

    Issue 2: Real wages are now rising. That is usually a symptom that we are at the start of an inflationary boom.

    Issue 3: Ultra-low interest rates are definitely contributing to high house prices and a bias in favour of the ultra rich and against the middle classes.

    Issue 4: The principal goal of economic policy (aside from environmental considerations) should be to increase GDP per capita, not GDP.

    Issue 5: An increased number of immigrant workers is not inevitable. We should be aiming for zero net migration for cultural reasons and to achieve ZPG for environmental reasons.

    Issue 6: There is only so much investment capital to go round. It should be spent on projects that give a financial return. Raising base rates to just above inflation sets a higher bar and makes us question low return projects like HS2 (Note: One of the Tory leadership candidates wants a review of HS2, the other thinks it’s the greatest thing since sliced bread).

    Issue 7: Financial institutions should not lend money they haven’t got. It is perfectly proper for the BoE to specify maximum loan book to asset ratios. What is not proper is for the BoE to stymie particular markets like the car market. Once we have decided to favour electric cars and diesel/electric hybrids, we need to finance the changeover.

    So I do not favour easy money. As usual, Hammond and Carney are doing the right thing for the wrong reason.

    • outsider
      Posted June 22, 2019 at 6:23 pm | Permalink

      Dear Lindsay McDougall, You make many good points. On Issue 1, I used to think that zero inflation was just too uncomfortable because as many prices would have to fall as rise, causing a lot of bankruptcies and frictional unemployment. So better to have a smidgeon of inflation to oil the wheels.
      Some truth in this but the real reason is that, in our democracy, governments cannot run sufficient surpluses in the cyclical good years to compensate for the deficits needed in the bad years. Calls for higher spending and/or lower taxes are just too insistent. So we need a modicum of inflation to “pay for” the underlying Exchequer deficits.

  18. cynic
    Posted June 22, 2019 at 8:02 am | Permalink

    There is a very good critique of Magic Money Tree economic theory on the Adam Smith Institute site. Well worth reading if you are interested in the relationship between money and the real economy.

    • Mitchel
      Posted June 22, 2019 at 12:50 pm | Permalink

      The venerable Michael Hudson has been writing persuasively about similar issues for a long time.Nomi Prins’ recent book,”Collusion-How Central Bankers rigged the System”is also worth a read.And you can go all the way to Lenin’s “Imperialism-the highest stage of Capitalism” for further enlightenment.

    • Lifelogic
      Posted June 22, 2019 at 2:06 pm | Permalink

      It is rather amazing that anyone is taken in by it. But then the BBC endlessly has lefty economist on like that dire Pizzicato (?) woman, Paul Mason, Corbyn, Mc Donnall …. and they even take them seriously!

  19. ukretired123
    Posted June 22, 2019 at 10:16 am | Permalink

    The Bank of England are just going through the motions of pretending to be in control but with so many dynamic world economic variables to fit in their economic models really are playing the role of aggressive goalkeeper so they don’t appear left behind and out of touch.

    From what Sir John is saying It seems they need to build some brand new computer economic models with new basic dynamic assumptions but are in the classic “Paralysis of Analysis” torn between Brexit reality and the headstrong Hammond. The
    They have ended up confused by their own erroneous force and we are at their mercy.
    Independent they are not and a clear out is long overdue.

  20. Alex
    Posted June 22, 2019 at 10:39 am | Permalink

    The Bof E runs the economy for the benefit of bankers because it is run by bankers. It does not provide any benefit whatsoever for small business or ordinary people but is loved by politicians because they can blame the bad consequences of their decisions on it. In a free world bankers would not be our masters.

  21. David Maples
    Posted June 22, 2019 at 11:04 am | Permalink

    Members of the MPC would struggle to pass A level Economics. They continue to rely on the discredited Philips Curve, with its in built assumption of full employment at around 97.5% of capacity. The mistake is in not realizing that approaching full employment will lead to more investment. There may be an element of rising prices, but it is a risk worth taking, because these act as signals to investors.

    • Al
      Posted June 22, 2019 at 8:00 pm | Permalink

      The problem with the ideas of ‘capacity’ and ‘full employment’ is that the definition of ‘able to work’ and ‘jobs’ have been redefined so often that it has very little to do with the country’s actual resources and capacity.

  22. Gareth Warren
    Posted June 22, 2019 at 11:15 am | Permalink

    I may still be stuck in the past, but to me rates appear very low still today.

    House prices are certainly very high too, but all the solutions to that will be best found in supply and demand.

    I do believe a looser policy will be needed for a WTO brexit to ease changes companies will need to make, but this could be solved by a special lending facility.

    Longterm sterling looks interesting, there is still a lot of it worldwide due to the legacy of empire weighing on its value. But not transferring £10 billion a year in EU fees and £2.7 billion a year in tariffs will strengthen it. The tariffs that likely will go up between us and the EU if they are vindictive (I believe they will be to start with) will also strengthen sterling.

    So while the old fashioned view is that rates are low, the likely direction is for inflation to go lower due to a stronger pound. That does make a case for lower rates.

    As a saver perhaps it would be better if there were a scheme where I could securely put my savingsa in ndustry or government debt, banks look low rate for some time to come.

  23. Hugh
    Posted June 22, 2019 at 11:35 am | Permalink

    2% inflation target = theft

  24. outsider
    Posted June 22, 2019 at 11:40 am | Permalink

    Dear Sir John
    Is is reasonable to claim that Bank Rate is too restrictive when it is 2 per cent below the annual rise in the cost of living and unemployment is historically low and falling?
    Is it sustainable and fair to the next generation to keep spending 4 per cent more than we produce in exchange for ownership of our companies, property and infrastructure – the family silver?
    Should the world’s nominally fifth largest economy have to rely on investors in China and the Middle East to finance and control our infrastructure investment because we can no longer do so ourselves?
    My answer, to borrow a memorable quote, is “No,No,No”.

    Reply IT would be unreasonable to hike rates, create a recession and make everyone worse off.

    • Mark
      Posted June 22, 2019 at 1:41 pm | Permalink

      It is unreasonable to hike the cost of energy ever higher above world market levels and tell our car industry that the government will ban its products in pursuit of unachievable climate goals, thus causing a recession and making everyone worse off (except the owners of subsidised green businesses).

      • Fed up with the bull
        Posted June 23, 2019 at 7:57 am | Permalink

        Well said Mark

    • outsider
      Posted June 22, 2019 at 2:44 pm | Permalink

      Dear Sir John,
      Thank you for your reply. If I had somehow read your blogpost without knowing who had written it I would have dismissed it as a banker’s ramp, but I have far more respect for you than that. I prefer to think that:
      a) Your contempt for the Bank of England’s posturing over the past four years, which I fully share, has temporarily clouded your judgment in favour of a short-termist approach , or less likely
      b) That you subconsciously accept that an open-market capitalist system can no longer sustain our mature economy without permanent negative real interest rates or some other version of the Canadian Social Credit Theory that Mr Carney may have subliminally absorbed, or
      c) That you accept that investment opportunities in the UK are so inferior to opportunities in China, India etc that the UK economy, like a few others, is destined for inevitable decline and just has to delay the inevitable.
      Personally, I reject all these negative conclusions, which would make our leaving the EU a pointless waste of time.

      • Simeon
        Posted June 23, 2019 at 6:38 am | Permalink

        It seems to me that, after decades of state interference, the vast majority of the world’s economies, and by extension the global economy, have been fatally undermined. It could hardly be otherwise. The last financial crisis was/is quite awful, but the next one will, inevitably, be even worse as a result of a weakened economy and a failure to address the fundamental problem. A day of reckoning is also inevitable, and the longer it is put off, the worse it is likely to be. In this context, any negative effects on the UK economy of a clean and proper Brexit will be trifling in comparison. A revolution in thought and practice is required. Such would be most painful. But if you’re going to rip a sticking plaster off, you might as well do it whilst your having your leg amputated, minus the anaesthetic.

  25. Chris
    Posted June 22, 2019 at 12:20 pm | Permalink

    Slightly O/T: Dominic Grieve is on manoeuvres again, apparently with a sizeable group of MPs, and the principal aim is to topple Boris should he adopt a No Deal strategy:
    https://www.express.co.uk/news/uk/1143899/Brexit-Boris-Johnson-no-deal-Dominic-Grieve

    The Cons Party cannot survive like this. These treacherous Remainers should go and join the Lib Dems or a blue Labour group.

  26. Steve
    Posted June 22, 2019 at 12:59 pm | Permalink

    Off topic:

    JR, would you consider running a blog about the biased BBC, and some press, now resorting to ‘smear’ tactics to try and nudge a remainer into No 10 ?

    I don’t pay my licence fee to give the BBC mandate to interfere with the governance of this country, nor do I pay it for them to intrude in someone’s private life when there is nothing of public interest.

    I think the BBC needs to learn a lesson.

    • margaret howard
      Posted June 23, 2019 at 12:02 am | Permalink

      Steve

      This BBC bashing is getting tiresome. Give it a rest.

      • Fred H
        Posted June 23, 2019 at 7:23 am | Permalink

        margaret…the BBC and other remainers should give it a rest. They lost – it has been 3 years now. Let go.

      • Fed up with the bull
        Posted June 23, 2019 at 7:58 am | Permalink

        MH. BBC bashing is well deserved and of their own making. You may be happy with it all especially as you are a remainer who just loves to run down your own country. Others are not!

      • Steve
        Posted June 23, 2019 at 8:12 am | Permalink

        MH

        Listen up; I am forced to pay a tax just to fund that public enemy – so I’m entitled to criticise them as often as I choose, and I won’t be taking advice from any leftist muck springing to their defence.

      • NickC
        Posted June 23, 2019 at 11:32 am | Permalink

        Margaret Howard, You like the BBC, you pay for it. And don’t be so childishly selfish as to expect me to pay for your propaganda.

  27. lojolondon
    Posted June 22, 2019 at 1:34 pm | Permalink

    The USA is fortunate in that they have Donald Trump as President. He saw the Fed getting it wrong and ordered them to reconsider their position. In the UK, we need a Chancellor who will focus on the facts, and demand very high performance standards from the BOE, it is unacceptable for them to be wrong on every issue all the time.
    Special mention for the BBC, who should be holding the BOE feet to the fire every time they damage the economy, instead we get very gentle ‘interviews’, that are nothing more than statements against ‘the folly’ of Brexit.

  28. BillM
    Posted June 22, 2019 at 1:54 pm | Permalink

    The BoE AND the Treasury is out of step because they both use similar economic models which depend more upon manually imputed maybes rather than real-time facts. Prof Patrick Minford once Economic Adviser to the Treasury wrote this piece some time back to expose the scare mongering coming from these Institutions.
    https://brexitcentral.com/ignore-treasury-bank-englands-latest-attempts-frighten-us-brexit/

  29. Stephen Reay
    Posted June 22, 2019 at 2:05 pm | Permalink

    It’s simply not normal to have bank rates below the inflation curve. Having bank rates below the level of inflation indicates a country with a weak and insecure economy . The Bank oF England should slowly increase rates as inflation comes down to get rates above the inflation curve at least then they will be able to drop rates if the country comes to crisis as a result of Brexit, if that truely even happens.

    This country has seen many years of growth since the 2008/9 finiancial crash. Prior to the crash interest rates wouldn’t have been below inflation.Today with low unterest rates below inflation the Bank of England is in effect stealing from savers.

    I’m sure Mark Carney will be long gone before we see any rate rises in this country.

  30. Richard Evans
    Posted June 22, 2019 at 3:05 pm | Permalink

    The BoE along with most other central banks is owned and controlled by the Deep State Establishment. (if I mention names this will not be published).Carney was an Establishment plant. We must rely on the The Donald to complete his plan with the US Fed.
    Regarding Boris, a likeable fellow, a blusterer, not the best candidate but popular with the people at present. Will he make it to PM? Will he deliver BREXIT with absolutely NO STRINGS attached? I really hope so but…… ???? If he does not then the “conservative in name only party” is truly finished. In addition the MSM Fake news media will do everything in their power 24/7 to take Boris down.

  31. ian
    Posted June 22, 2019 at 3:07 pm | Permalink

    At least have the balls to do away with a central bank that you do not need, put the money up and buy back your QE bonds.

    All that going on is you send someone 500 billion in bonds and they send you back the interest on the bonds, if all bonds go negative then nothing comes back to you-you might have to start sending money to them, but if bond prices go down and interest on the 10-year bond goes to 5 per cent, at the moment they are under 1 per cent, so with QE you are only paying interest on 800 billion of bonds, not 1.8 billion because 500 billion QE cancel out 500 billion of gov debt, but debt interest each year is always around 50 to 55 billion a year, so with interest rates at 5 per cent you would need to find at least 100 billion in extra interest payments to bondholders every year, you can QE more but that come with its own problems, like nobody want to buy your bonds, your a bad risk on top of currency going down and interest rates going up even more.

    It a Mickey Mouse system and they keep it in place waiting for the next bailout and hope to do the same as last time and bail themselves out on the backs of the English people.

    The only way to do it is shut down the BOE working for the treasury and gov, close down QE and don’t borrow any more money, your debt goes down to 1.3 trillion from 1.8 trillion and your not borrowing any more money, hard but doable.

    Your interest on your 10-year bond will go down to 0.5 per cent all year round and could fall in line with Germany interest rates of 0.25 per cent, with everybody wanting to buy your debt because England is a good risk now instead of a bad risk and the pound is stable, the debt interest goes down to 30 billion a year instead of 55 billion a year, that leaves 25 billion a year extra for economy which is the 25 billion you are borrowing this year, now that wasn’t hard was it.

    That how you can turn it around and end up with 25 billion a year extra to spend into the economy and you want to start paying down the debt by 10 billion a year your interest payment will go down further to pay for most of it, you become one of the strongest countries in the world instead of one of the weakest countries.

    What they are doing is about bailing themselves out when it all goes wrong as they know it will do in the future, all they can see is money which they can get hold of for themselves, and they are short-sighted because the bail out won’t be coming anyway, why the gov would shut most things down and go right into bankruptcy while sacking gov workers as they go while shutting down services and all their art and gold with shares and other assets would be worthless to them and the banks go bankrupt, the debt that these people have borrow will be handed down to new or surviving banks and the vast sums of money they owe needs to be paid back, after all, that the only way to become rich is by borrowing vast sums of money and paying a small amount of interest as corporations do, your either in the know or not, that why they call them the one per cent and body else in the banking system pays for them.

    If they had any intelligence or sense they would take note but the fact is they as thick as two short planks, all they can see is the money laying around them for nothing and want QE kept in place for their own benefit, in other words, they are living off the 99 per cent or 90% and the way they see it is, when you lose everything, jobs, services and access to borrowing they keep everything by the way of bailout and more QE for them switch you pay for.
    Now would it not be better to do it my way by saving everyone and make the country strong again instead of trying to save the one per cent which not work anyway.

    Sir John Redwood believe in the system, i don’t, who you rather put your money with, me or John.

  32. Prigger
    Posted June 22, 2019 at 4:00 pm | Permalink

    Sky News ruined their own broadcast today of Boris and Hunt by over-speaking and blotting out the question from the official interviewer to Boris, and his answer, whatever the contents were. They replaced the conversation with what Sky News considered was okay in their own words and was “bad language” when a questioner from the audience quoted a quote from something Boris said once upon a time. Sky News did not quote the ‘bad language’ which would have helped to know what Sky News was on about.
    It’s their party and they’ll stay shtum if they want to. But they do not deserve a broadcasting licence. They have too much to say on their own part.
    In future perhaps politicians will agree to have their performances broadcast LIVE by another TV network.

    • Prigger
      Posted June 22, 2019 at 4:30 pm | Permalink

      I wrote in an earlier comment perhaps not accepted for inclusion in these Comments that our Education is on the point of total collapse. By ‘Education’ I included by implication that we are at the point of the Total Collapse of the English Language.
      The Sky News incident was a 30-second long Total Collapse of the English Language.
      We should expect longer lasting and more frequent incidents.
      As before, I express the hope that when Boris becomes PM he also appoints himself Secretary of State for Education. He should prioritise, from this one perspective, that students be taught about contextual grammar, and Contexts, Silos, of Thought and expression.

      • Steve
        Posted June 22, 2019 at 10:41 pm | Permalink

        Prigger

        Perhaps that should include some emphasis on when to use capital letters.

  33. ian
    Posted June 22, 2019 at 4:34 pm | Permalink

    Yes, i rather have interest rates down with German interest rates than running QE and bailout for the few.

    They believe in bailouts and QE in the financial sector and government instead of running a sound monetary policy as Germany, which is easily done.

    To busy wanting to spend your money on HS2 and other things like that which are no benefit to you, only benefit the boardrooms as they put their pay up by a hundred per cent as the project rolls along with the big bonus to boot as I tell you, they are wasting your money to benefit themselves leaving you huge debts to pay in a volatile interest rates environment which can go wrong at any time in the future.

    It is not capitalism it socialism of the one per cent or 5%, they everybody running around after them and they’re every need taken care of and sod everybody else.

    Well capitalism does not work like that, zombies companies and people with too much debt and not much work should be closed down, but they are not doing their job, then the gov and bankers are keeping them alive with your money which is all wasted on zombies.

    They won’t let zombies go to the wall, people or companies because they know them and go out with some of them and have the ability to threaten the gov with stories of what they can do to the country and the people, so bail us out or else we will bring down, that how they work zombies and is they doing and what is happening, in other words, the people nobody in the government or anywhere else to stand up against these companies and people who live life at the top but really zombies with just threatens to keep them afloat.

    In a nutshell that the problem you have, nobody strong, to put these people and companies in their place, they walk all over them like with Brexit and media backing them up.

    As I say, the debt of this country is easy to turn around but zombies won’t let it happen because all bail would stop which means the end of them and their friends.

    Zombies rule.

  34. Rick
    Posted June 22, 2019 at 5:04 pm | Permalink

    The Think Tanks must think we are very stupid if they think that a distraction like a domestic disturbance can take from the important issues, questions that are not being answered

    • Steve
      Posted June 22, 2019 at 10:47 pm | Permalink

      Rick

      It isn’t a distraction tactic, it’s an attempt to smear Boris Johnson in the hope of nudging a remainer into No 10.

      Expect more cheap stunts from the media, especially from the detritus at the BBC news team.

  35. ian
    Posted June 22, 2019 at 8:38 pm | Permalink

    You can not do anything till you sort out the country debt first, then even out borrowing in the banking system so more money made available to small and mid-size businesses and cut money lent to the share market and housing market, it only takes a small percentage change of less than five per cent, even three per cent of borrowing taken from shares, housing and big businesses would be a massive boost to small and mid-size businesses coupled with a cut in interest rates they pay.

    Then you need a plan for a new tax system and pension system, i have written on this blog before about new tax system which put zombies in their place with gross taxation and taking 27 million people out of tax and doing away with employment tax with only companies and self-employed paying tax and when net wages become gross wages and then people earn more than 75 thousand pounds would be the old gross earnings of 149 odd thousand a year, i would think people on money would have the wherewithal to sort out their own pension without gov help, so the pension the gov has at the moment of 42 billion or 48 billion or whatever it is, set aside 33 billion of that money to the new pension and the rest to services and new infrastructure, could as much as 15 billion pounds.

    You see money is there, i would take away R&D and subsidies to companies and with the new gross tax system, only give companies who pay tax a tax cut on their gross percentage and are doing a good job, in other words, i will not pay money to zombie companies and save a few billion at the same time while saving 12 billion from the EU, 15 or so from pension system, 25 billion from interest on bonds and could even cut overseas aid by 5 billion, a good old saving of 60 billion and everybody is better off with old age pension still intact for people as well.

    Next year budget will be getting on for 900 billion pounds and i sure i could make more savings but 60 billion saved is a start, paying income tax 45% and then claiming it all back with your pension and ending paying no income tax, has got to stop.

    They are taking the bread out of poor people mouths and leaving them to retire with next to nothing after working most of the lives, instead of looking out for them and making sure they get a good deal at the bottom.

  36. Prigger
    Posted June 22, 2019 at 9:13 pm | Permalink

    Sky News has replaced the possible, though no-one knows, Anglo-Saxon word in the Hustings today by the word ‘beep’ or as they rightly write it ‘bip’ ( as in modern EU ) .Our media lives in its own world just after 1066 . Watch out for their cunning new tax collectors book cleverly titled “The Doomsday Book” which , seems more like a threat than someone wishing to give all the tax-money to the NHS . Their presenters look quite old too.

  37. Derek Henry
    Posted June 22, 2019 at 10:17 pm | Permalink

    And of course when they increase the price of borrowing companies just pass the increase onto their consumers via higher prices.

    Rate hikes = inflation.

    Then you have balance sheet reduction as the banks are awash with reserves. Balance sheet reduction is the opposite of QE.

    Instead of swapping interest bearing assets for reserve balances they just let the assets mature and issue new interest bearing assets. Which again can cause inflation due to the interest income channels.

    As per usual they have it upside down and back to front acting as if we are still on the gold standard.

    Most fears expressed by economists, policymakers, and the financial press regarding the rise in reserve balances since the crash presume—like the inapplicable money multiplier myth model—this will necessarily lead to excessive creation of loans and deposits by banks and thus rising inflation.

    But this cannot possibly be true. Banks have the same ability to create loans with £800 billion in reserve balances that they had with £20 billion. The difference after the crash was mostly that they did not see as many creditworthy borrowers coming through their doors, given the deep recession, which led them to create fewer loans.

    Carney lied and said he was increasing the reserves to the commercial banks to encourage lending. It made no sense and he knew it at the time.

    In Canada when Carney was in charge, reserve balances were effectively zero for over a decade, and bank lending continued as it did anywhere else. Canada’s inflation was also similar to that of the U. S. at the time.

    In Japan, under the so-called quantitative easing regime of 2001-2005, reserve balances reached around 15% of GDP, and the monetary base (reserve balances plus currency in circulation . . . often termed “high powered money”) reached 23% of GDP. But Japan has, if anything, experienced deflation during and since this period, which is not surprising, since—again—the rising quantity of reserve balances did not enhance Japanese banks’ abilities to create loans.

    In the U. S., by comparison, reserve balances had reached about 6% of GDP, with the monetary base rising from about 6% to about 12% of GDP after September 2008. Those fearing rising Fed reserve balances apparently haven’t noticed that an increase in reserve balances about three times the size in terms of GDP already happened in Japan, with none of the effects that have been predicted for the U. S.

    In short, don’t fear the rise in the Fed’s reserve balances. It is not inflationary because the money multiplier view, found in the textbooks, doesn’t apply to the flexible exchange rate monetary system of the UK The UK may indeed experience rising inflation in the future (or it may not), but it won’t have anything to do with the quantity of reserve balances banks are holding.

  38. Derek Henry
    Posted June 22, 2019 at 10:30 pm | Permalink

    What if everybody decided not to spend anything, any of their income, they just stop spending any money at all? What would happen to the economy? Well, the answer is it crashes.

    There’d be nothing sold, there would be no jobs, no income, no economy. It would be a disaster. So the economy is dependent on people spending their income, and what follows from that is, for anyone who spends less than their income, somebody has to spend more than their income to make up for it, or the sales don’t hold up, the output doesn’t get sold, and you have unemployment and serious economic problems. A large part of the economy that naturally spends less than their income are people who, when they get paid, money goes into a pension fund or a contribution or it gets withheld, they don’t get all their income to spend, and they don’t spend it all anyway, they keep a little bit in cash. And then you’ve got corporations that build reserves, they don’t spend their income, insurance companies take in premiums and they don’t spend all their income, they save some for later. All the cash in circulation is income that hasn’t been spent yet. And then you have foreign central banks that will hold euros in savings. That’s income that hasn’t been spent yet. So you’ve got all these savings desires, all these entities that try to save euro and spend less than their income. Well, something has to make up for that or else you get a bad economy.

    If you look at the first seven or eight years of the euro, the private sector credit expansion was the source, that’s where everyone was spending more than their income. They were borrowing for houses, Spain had a big housing boom, they were borrowing for cars, there were businesses borrowing to expand. You had all these entities in the private sector spending more than their income to make up for all of the entities that were spending less than their income. It was sort of okay, unemployment went down from eight percent to seven, there wasn’t any blood in the streets, people were sort of happy with it. But then the crisis hit in 2008, the credit crisis, and suddenly the people who were spending more than their income couldn’t do that anymore, and credit just stopped. Now, there was no one to make up for all the entities, all the people spending less than their income. There was nobody out there spending more than their income. And so, the economy stalled and unemployment went straight up.

    Now, governments could very easily make an adjustment to spend more than their income. They could lower taxes and they could increase public spending, public services, and the government could make up for the lost spending, make up for people’s savings, spend more than their income and fill that gap. And by cutting taxes, they could allow the private sector to have more income, to have more spending, and again fill up the gap. Depending on your politics, you could either reduce taxes or you can increase public spending. I’m not trying to take sides on the left-right debate here about which is better, but governments can’t do that in the European Union because they’re all limited by three percent deficits, and that’s not enough given the lack of private sector credit and the natural desire to save. Europeans are very good savers. It’s not enough to make up for the people not spending their income, so all this income goes unspent and the economy suffers.

    The irony is that the deficit limits in the European Union are rewarding the bad savers and punishing the good savers. The three percent increase in debt allowed every year means that savings, net savings of financial assets in the European Union are only allowed to grow at three percent per year, and any country that requires larger savings than that because of its institutional structure suffers the consequences of high unemployment. And, the countries that have high private sector debt growth and therefore don’t have high net savings desires, they benefit.

    More recently, what the ECB has been doing, what Draghi’s been doing, has been tricking the world’s portfolio managers into selling euro by doing things that they think are inflationary, that they think are expansionary, things that cause a currency to go down, and those are negative interest rates and quantitative easing. They are myths and Draghi has used those myths to his advantage.

    All the world’s Western-educated economists, they’ve all gone to The University of Chicago and Stanford and the London School of Economics, and they all think that pumping up the money supply through quantitative easing and negative rates makes the currency to go down and it causes inflation. They’re wrong, In fact, those policies remove interest income, they’re taxes on the economy, they actually cause the currency to get stronger, they cause the price pressures to go lower, you get deflationary pressures instead of inflationary pressures. When you anlyse the real data the policies of quantitative easing and negative rates have done nothing to ease that. They’ve frightened portfolio managers around the world into selling their euro.

    An analogy would be if the corn crop failed because it didn’t rain and there was a drought. You would think that the price would go up because of supply and demand, but if a big company…had a huge warehouse full of corn, and had it backwards and decided to believe that the drought was going to cause prices to go down instead of up and they started selling their warehouse full of corn, well the price would go down even though there was a drought and a shortage, because all of the supply is coming out of the warehouse. That’s portfolio selling, so to speak. Eventually they’re going to run out, and there is a shortage, people are eating more than is being grown and the price is going to go up at some point, but depending on the size of their warehouse, the price can go down for a long time. It can go down for a year or two years, I can’t tell you the timing. But you can see the flows when you see the international accounts. You can see it’s going down and you can see the euro reserves are dropping all over the world in all of these official types of accounts, and they can only drop so far and then they’re gone. And as they do drop, they’re keeping the euro at levels that’s supporting a growing trade surplus, which is trading the euros out as fast as they’re selling them, and then they’re gone and then everybody’s underweight in euro or short, and they are no euro to buy back. Then it goes the other way.

  • 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