Category: Blog

So it’s another inflation letter. That’s no suprise for readers of this site. What is so sad about the MPC is their failings are so predictable. They lurch from boom to bust to attempted boom, and the inflation figures career all over the place as you might expect. Today they had to report that during the worst downturn in the economy since the 1930s inflation has soared to 3.5% on the CPI, 3.7% on the RPI and well above 4% on RPIX. Now the savage cuts in living standards that Labour’s economic policy was always going to deliver are upon us, as wages are not going up by anything like the current rate of inflation.

In 2008 I explained that rates were too high and this was going to cause a worse downturn. In 2009 I warned rates were too low and too much money was being printed. That was bound to cause an inflationary surge. The MPC is meant to concentrate on controlling prices, and keeping them to around 2% a year. Why do they find it so difficult?

They are not asked to avoid slump or control booms, to consider output or the levels of the currency. Sometimes they seem to be acting as if they were, but they do this also by reacting too severely too late. We have lurched from overheating to severe downturn despite- or more properly owing to – their energetically destructive monetary policy.

Today they tell us we have very low interest rates and they are going to keep them that way despite the high inflation. They have no sense of irony – or apparent knowledge of the real world. On this very day we learn credit card rates are above 18%, or 37 times the base rate! The other day a local bank told me a small business could borrow at 8.5% or 17 times the base rate. Mortgages if you can get one are on offer at around 9 times the base rate.

Who is the MPC kidding? I fear, just themselves. Their rates are too low and their money printing has been too energetic. No-one in the private sector can do any business at anything like so called base rate. Markets largely ignore the MPC. All they seem to want to do is to help the government overspend, borrowing more cheaply, whilst the rest of the economy pays totally different rates. Meanwhile the regulators force the banks to lend less and raise more capital at the bottom of the slump, making it more difficult to finance a recovery. No wonder we are in mess.

In the shops last week-end I looked at the labels of the merchandise. Some clothes shops were full of garments from China, interspersed with items from Malaysia, Viet Nam and India. They had nothing from the UK, nor from the countries of Europe that used to pride themselves on fashion and style. The electrical and household goods departments told a similar story, awash with imports.

It is the case we still have some good retailers. Some of the shops are owned by UK shareholders. They may be financed by UK banks. The truth is, the longer we run such a large balance of payments deficit, the more UK businesses will have to be sold to overseas buyers to pay the bills for our enjoyment of so many foreign products.

Some people say we cannot make things successfully in the UK any more, because wages are so much lower in Asia than here. They do not understand modern manufacturing.

The keys to success in modern manufacturing are quality and automation. The direct labour cost in many modern products is low. Materials costs are higher and rising, as China scours the world for ever more commodities. The costs of design, management, machinery and the supply chain are important. Employing fewer well trained people per unit of output is often the key to success. Because labour is cheap in Asia, Asian manufacturers often use it badly.

It is quite possible to make things in Britain, make them well and make a profit. The fact that so few do these days tells us something else. For all the fine politicans words about manufacturing, government often does not want industry. Planning controls, regulations and tax regimes are hardly encouraging. Nor is our culture any longer proposing we be the workshop of the world. In schools discussion is likely to be of pollution and industry’s large contribution to global warming, rather than to the importance and the rewards of making things for ourselves.

The UK seems to be happy to import its lifestyle from China and borrow the money. It has the added moral luxury that we can then blame China for the pollution she creates for us, and can enjoy the benefits of low wage labour intensive production. That does not require us to be mean to our UK neighbours over how much they are paid. We borrow the money to pay the benefits bill instead.

The gnawing worry I have is how much longer will China go on working so hard and lending us the money to live at such a higher standard than they enjoy? Isn’t it high time government turned fine words into less government action to thwart or put off would be manufacturers and investors who could start to get Britain working again? China doesn’t have the high corporation and income taxes we have, and it does not take months or years to get a planning permission.

It is fashionable to say that baby boomers – people born from 1945 to the early 1960s – were the lucky generation. They got free places at university, had final salary pension schemes from well heeled jobs, and became rich just by buying and living in a house. Their parents fought a war and were poorer. Their children are also poorer, and are alleged to live in a much more difficult world than the baby boomers enjoyed in their younger years.

I don’t buy all of that. Lots of baby boomers did not enjoy all those goodies. Baby boomers had to be very competitive to get to university. For every one who made it to academe nine did not. Today the odds are much better. It is true some of us got a full grant to pay their expenses at university, but when they left they had to pay 83% tax on part of the income , which more than paid back the student fees they received. A student loan would have been a much better deal for successful students than Labour’s confiscatory taxes of the 1970s. The first job I got in the City almost disappeared under me when the department I worked in was halved owing to the chronic instability of UK financial and economic policy in the 1970s. City remuneration in those days was a fraction of what it is in state subsidised banks today.

Buying and owning a house did allow many baby boomers to participate in the huge house price inflation. It did not , however, make most rich, as they still needed the house to live in. In most cases the only people it is likely to make rich are the children of the baby boomers, as the value can only be released on death. If the children stay friends with their parents they will harvest the windfall, therwise we are going to have very well funded cat and dog homes. There was no income to stay on at school for poorer children, no array of income top up benefits. The economy of the 1960s and 1970s was much poorer, with fewer good job offers and far less foreign capital and talent in London creating more wealth and enterprise.

Today we have changing of the guard. A younger generation is capturing control of some of the large institutions of government, the public sector and the larger private corporations. Many baby boomers are still full of energy and ideas, so they are being driven to be more entrepreneurial. They will earn their money, and will contribute to the economic revival we need.

The baby boomers have stayed out of conscription for a large war, which is indeed fortunate and sensible. So too have their children, so it is not a unique good fortune to one generation. There is much about the modern world that is richer, fuller of opportunity and better than the world of the 1960s and 70s. The digital revolution has made sweeping changes to the way we live. The new generations have been living on debt and off the hard work of Asian exporters. The noughties were a decade when dreams for many came true. The next decade may be tougher, as the bills fall due.

It is a significant moment, when senior economists write to the Sunday Times warning that we need to cut the deficit to sustain the recovery. It is even more important that they think deficit cutting should mainly come from spending cuts, not from tax increases. They delphically warn that some tax increases on employment and investment could make things worse.

This government’s tax increases already threaten us with less investment, fewer companies staying here, and fewer entrepreneurs taking risks here. We need tax and regulatory cuts to favour company investment and more enterprise to have a chance of growing our way out of some of the financial trouble we are in. Our corporation tax regime is now a threat to jobs, and the new higher income tax rate will add to the grief. When I first warned of a coming financial and business crisis and the UK’s growing lack of competitiveness in 2007 it was a fairly lonely position. Today it seems at last to be mainstream. Now we need a government to do something about it.

As forecast, it has not snowed since I swapped my Jaguar XF for a Freelander! It worked.

I find it an improvement. So much of what passed for controlling the Jaguar had to be executed by pressing on a flabby touch screen. If there was sunshine it was difficult or impossible to read it. If you put sidelights on in fog, rain or on a dull day the car automatically dimmed the touch screen as if it were night, making it difficult to read. The screen soon was covered in fingerprints however clean your hands were.

The Freeelander has dials and push buttons to control the CD and the radio. It has knobs and buttons to control the heating and cooling and the seat warmers. It has push buttons and dials to use the telephone. It is all so much easier and more visible.

The manual override for the automatic box is a bit better than the Jaguar’s. It still changes down when you don’t want it to, but it does go into higher gears more often and stays there for a bit longer if you ask nicely.

It’s true it has a touch screen for the sat nav. Like the Jaguar the sat nav knows best, often switching displays when you have not requested it. Like the Jaguar it gives you ludicrously optimistic arrival times. All these sat navs seem to think you can average around 30 mph in built up areas, allowing no time for the endless traffic lights , pedestrian crossings, level crossings, road works, chicanes, badly parked vehicles, buses and cycles that make a 10mph average pretty good.

No 4 x 4 is beautiful, but the Freelander is handsome when you compare it to many other 4 x 4s. My fuel economy is 25% better than the Jaguar, as it is a diesel with a more sensible gear box. The Land Rover is classless, well suited to the gritty reality of 2010. It’s a working car, with many practical features. So far it has not got stuck in the mud and has not skated on the frozen car parks and side streets. I could go a meet a dustman at the Ritz or a Duke in a muddy field – or is still the other way round in Labour’s Britain? The Freelander would look fine for either.

I miss my S Type, but I’m not going back to the XF. It’s such a relief not having to fight it every day.

There have been two types of government economic policy. One set of policies has tried to delay the inevitable adjustment to a world of lower borrowing. The other set is starting to cut living standards, as the government tries to stave off a worse financial crisis.

Money printing was designed to delay the adjustment of the public sector. Cheap money flowed to the government, so the public sector could carry on recruiting and paying generous wage and salary increases to many. Public budgets were padded,the range of benefits increased, and numerous temporary schemes deployed to seek to keep people off the lists of the unemployed for a few months. The VAT reduction, the car scrappage scheme and many others were time limited. Banks were propped up in the most expensive way imaginable, saddling taxpayers with huge debts and risks. They were lectured to lend money to the private sector, but their Regulator told them to rein in their lending to anyone other than the government.

Meanwhile, a large devaluation slashed all our living standards, making imports dearer. It was most visibile in the increases in petrol, heating oil, gas and diesel prices. It is fuelling the current rate of inflation, which is far faster than most private sector wage increases. Keeping money tight in the private sector drove more into bankruptcy and unleashed a wave of redundancies especially in manufacturing. Now we see the beginnings of the Labour squeeze on the public sector, with the cuts in university funding, and the announcement of zero wage increases for local government from April 2010.

With public spending representing around half the total economy, and with a government wishing to halve the deficit running at 12.5% of National Income, the prospective government squeeze will be a big cut in living standards unless they can generate some offsetting growth.

To do that they need to cut taxes on job creation, business and entrepreneurship. They need to make the UK the best place in Europe to make things and to run services. They need to strengthen competition policy to open up market opportunities, and deregulate to make it easier to set up and run a business. If they don’t, their target cuts will take a big bite out of average living standards. If they don’t cut public spending, markets could take an even bigger bite out of our living standards, as they are doing to Greece, and have done to Ireland.

I have been out and about speaking about the crisis over the last couple of days. I find it easiest to compare the national budget to a family budget. It’s the comparison that the government seems to fear most, as it is the most obvious. We all know that if we have overdone the credit card, have a big mortgage and lots of hire purchase, paying all the bills becomes difficult, and could become imposssible. You have to rein back on new spending and pay off some debt. It’s the same for a government. The bank manager is the financial markets. They will only put up with so much. The clock is ticking.

With Greece nestling in the Euro zone, the EU Euro summiteers yesterday tried to give the impression that there would be gifts for the Greeks to save them within the zone. There was no detail, however. It was all spin and mood music, no deals, no loans with conditions, nothing save stern words on how Greece would at last control her deficit. France and Germany know words are cheap. They were full of comfort and strength, but they did not sign any cheques. Nor should they.

The truth is many European countries have borrowed too much and are still borrowing too much. If country which is weak financially has to go to the aid of another country which is even weaker, you do not end up with two strong countries, but with two weak ones. The danger in a weakened Euro zone is that if one country needs a big bail out, it may start to drag down others and in turn undermine the whole system.

The bizarre thing in the whole debate is how many people just assert that cutting public spending by 10% is too much, too cruel, impossible. Given the enormous waste and inefficiency of European public sectors, cutting by 10% is technically very easy. If they really do believe in solidarity all they need do is cut all the salaries, other than the lowest paid, by 10% and put on a staff freeze: the costs will come roaring down. It is high time the public sector joined the reality that parts of the private sector has had to endure for a couple of years. There is no way out of a debt crisis other than curbing spending and repaying some debt. The longer they delay the inevitable, the worse the crisis will be.

Greece is today in the front line of the battle between the markets and overspending governments. Tomorrow it could move on to include Portugal, Spain, even the UK. The markets will want to extract higher interest rates from governments that borrow too much. THey will want to force a change of conduct they believe in. Just as governments were all too ready to preach to banks and the private sector about the perils of borrowing too much, so markets are now in a mood to do the same back to governments.

Therre are senior Greeks who think Europe owes them a living. They seem to think they have a right to spend far too much on their unhappy and poor performing public sector and then to ask the Germans to pay the bills.Their efforts so far to cut spending and set out a course to get their deficit down have not won the confidence of the world’s money lenders. Their public sector workers object to pay cuts, when that offers them a much better way forward than wholesale redundancies. They have protested about doing what many in manufacturing industry around the wrold have had to do to survive over the last two years.

In the UK the government seems to think the world owes it a living. The administration thinks it can carry on borrowing, with the global money lenders happily paying the bills for the excess public spending. The main difference between Greece and the UK is that Greece belongs to Euroland and expects the EU to bail it out, whilst the UK is outside, and can put off adjustment a bit by devaluing its currency.

The numbers for Greece and the UK look very similar. Our public borrowing if properly stated is very high, higher than Greece’s. Both countries are attempting to borrow more than 12% of their GDPs this year and had hoped to carry on with high levels of borrowing in the following years. Both are now claiming to be ready to slash their deficits in future years, without clear and convincing plans on how. The UK’s devaluation has eased some of the pressures on the private sector, but has made the plight of the public sector worse as that sector imports a lot and exports very little.

Yesterday I asked the PM a simple question – Why, uniquely amongst advanced economies, has the UK got an inflation rate well above target and rising rapidly? It should not have been a difficult question for him to answer. After all, yesterday the Bank of England attempted to deal with its inflation critics by forecasting and promising a collapse in inflation again later on this year after the spike. Instead I was treated to an irrelevant rant based on his caricature of my policy recommendations. He failed to mention inflation or the state of the banks. No wonder people have so little confidence in this Parliament when we cannot have a sensible discussion of whether our inflation rate matters or not, and whether it will subside or if it could get another boost from further devaluation.

Governments think it’s time to blame the speculators again. You may remember the speculators and share shorters who dared to sell bank shares during the monetary and regulatory collapse of 2008. They were the cause of that crisis according to some official sources. Governments recommended at the time stopping people selling bank shares short, as if that were going to resolve the collapse of banks, brought low by bad banking and by excessively easy credit and banking regulation.

Today Greek and Spanish officials are briefing that bond speculators are bringing down their government debt for no good reason. Apparently investors and markets should go on lending as much as these worthy Ministers and officials want to borrow, so their salaries can be paid regardless of the financial plight of their countries.

Socialist morality is difficult to grasp. Apparently poor Chinese, who live on incomes far below those of Greek or Spanish officials, should have to lend to Greece and Spain so those same officials can carry on enjoying their high salaries. Those officials will then buy Chinese goods at cheap prices with the Chinese money their state has borrowed, so the Chinese can carry on working in the fridge or tv factory. The Chinese workers may not themselves be able to afford the tvs and fridges which they make, but collectively they should lend rich countries the money so westerners can.

These officials should stop wallowing in self pity and self justification. Countries like Greece, Spain and the UK have been borrowing too much. The Chinese and others do not have to go on lending to them. It is time for them to sober up and get a grip on their excessive deficits. Speculators helped save the UK from the political madness of the Exchange Rate Mechanism, forced upon us by all three main political parties. Speculators may well speed up the obvious necessity to limit debt. If they do so future generations should be grateful. Allowing these present governments to carry on borrowing is as kind as allowing the alcoholic with a weak liver to carry on drinking alcohol.

PS: There is a bit a fight back going in the EU against the idea of Greek bail out. Axel Weber of the ECB has said of the Greek plan to slash the deficit ” Now actions have to follow words”. Official German governemnt spokesman Urich Wilhelm has put out on Reuters a rejection of “unfounded reports citing coalition sources saying a decision for aid for Greece has in effect been made”
The UK government should make it clear as a non Euro member we certainly won’t be signing a cheque for Greece with all the money we have borrowed and printed.

As David Cameron said, after 13 years in government and just a couple of months before a General Election, the Prime Minister has been miraculously converted to changing the voting system. All those doubts and disagreements with such changes which he used to harbour and deploy under Mr Blair have been overcome.

The AV system is inherently unfair. If you vote for one of the two most popular parties you only get to vote once. If you vote for a party that cannot win you effectively vote twice, as your second preference then helps decide which of the front runners has won. Why is this fair?

If I go to a horse or car race, I expect the car or horse that comes first to be the winner. I do not expect the judges to say that as the first and second were close they will ask the losers who they would like to win. Nor do we say that as it was close the first and second place have to run it again without the others to see if one is faster without the others getting in the way.

Don’t meddle with a tried and tested system which we can all understand. Conservatives didn’t complain about the voting system for all those years when it made our fairly poor voting performance even worse in terms of seats. That’s just being a bad loser.