Claimant count falls in July post Brexit vote – another gloomy forecast bites the dust

The latest excellent figures for employment and jobs include the good news that in July the claimant count fell further. All those who shifted their forecast of job losses from the uncertainty of run up to the vote to the immediate aftermath of the vote have been proved wrong on both counts.

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Buying bonds cuts state debt- though so far they will not admit it

Japan, the Eurozone, the USA and the UK have all run programmes to buy up state debts through Central Bank action. In each case they buy the bond, but keep it, pretending that the state still owes the money. They find a way of accounting for the fact that they pay the interest due on the bond to themselves – it goes from one government account to another, as the Central Bank is  a creature of the state. It may have a little more meaning in the case of the ECB, buying up the debts of a range of countries. When the bond falls due for repayment they repay themselves, and normally reinvest the money in another bond they buy from the private sector.

In the case of Japan the purchase programmes have been particularly large and long lasting. There with state debt at a massive 230% of GDP they have avoided a problem meeting the interest costs of the debt by the twin effects of QE. Rates are now tiny or negative on new debts incurred. More than one third of the total state debt is now owned by the state itself through the Central Bank. The Japanese now have various options. They do not seem ready to simply announce they are cancelling all the debt they  owe themselves, as they could do. They might find a half way house. They could, for example, convert all the state debt they own into irredeemable or ultra long non interest bearing debt, which is almost the same thing as cancelling it though it  might look more prudent to some.

In the Euro area the latest substantial programme is running at Euro 80 billion a month, mainly government bonds. The authorities already own Euro 875bn of bonds. In the UK the Bank has decided to add £60bn to the stock of £375 bn they already own, out of a total state debt of £1.7tn. The US owns 12.8% of the stock of US Treasury bonds issued. All this means the actual indebtedness of these advanced countries is lower than the gross figures. The stress of having so much debt is doubly reduced,  by the very low interest rates they now have to pay people and institutions that do lend them money, and by the fact that they owe so much to themselves.

So far this process has not triggered worrying domestic inflations in the way you might expect, thanks to the weak state of many commercial banks over the banking crisis, and the fiercer controls against extra lending on the back of the money in circulation. There have been some inflationary pressures from weak currencies, which could be  brought on by relatively looser money and higher rates of QE. All the main countries in recent years seem to have favoured some decline in their currency, or have been unwilling to do anything to stop it. They cannot all devalue at the same time against each other. It will be interesting to see which if any of these authorities makes the next move in these unusual changes to the cost and ownership of state debts.

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The Labour leadership

In my piece about the contest, I asked what was the point if Mr Smith ended up offering more or less the same policies as Mr Corbyn? The answer from the Owen Smith campaign is he can win an election to carry them out, whereas Mr Corbyn cannot.

Today a poll is published (BMG Research). It says 9% of the public would be far more likely to vote Labour if Mr Corbyn wins, and 10% a little more likely. For Mr Smith just 5% would be far more likely, and 13% a little more likely. Mr Smith has some way to go to prove his point.

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Olympic medals and Brexit

Fewer UK medals at the Olympics was one of the small number of  bad forecasts Remain did not get round to making in the event of a Brexit vote. That was a good thing for them, as UK athletes are excelling themselves in Rio.  Nor did the  Leave campaign  claim there would  be more medals once we voted to be an independent country again, as that would be to politicise sports in an unattractive and misleading  way. We all send our congratulations to our Olympic competitors who are achieving so much thanks to their own great efforts.

It is nonetheless interesting that the top three  countries in the medals table alongside the UK in second place are all independent countries, not members of the EU.  France, Germany and Italy, the best placed EU countries, look unlikely to get into the top three.

You could argue that medals in the Olympics and membership of the EU are unconnected, so why raise the issue at all?  I do so, because it does pose an interesting dilemma for the increasingly centralised state of Euroland. Fostering a sense of national pride in the achievements of fellow countrymen and women, within the context of the brotherhood and sisterhood of world sport, is an important part of the Olympic spirit and attraction. One of the main interests in  the Olympics is the Medals table, which is deliberately constructed around national identity. Olympic athletes returning with medals are feted as national heroes.  The pro Europeans, ever keen to promote an overriding sense of European identity around the 12 stars flag, have to watch as France and Germany, Italy and Spain revert to their national symbols and colours.

The Olympics also poses a problem for EU ideas of collaboration.  Global sport proceeds by intense competition. Each individual and each national team is out to beat their rivals. Secrets are developed and preserved to gain an edge, not generally  shared with other competitors. Excellence is reached by supreme individual effort, backed up by strong national training, funding and general support. The results are stunning, with regular improvements in what men and women can achieve. World records are smashed and  the human frame pressed to yet finer and faster attainment. This is all very different language to the language of the Commission based on solidarity, mutual support and exchange.



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Economic crises are often generated by the authorities

My life so far has been punctuated by recessions and economic crises. These have usually been caused by a mixture of wrong government policy and poor Central banking. After all, between them government and the Central Bank wield enormous power to boost output and jobs, or to control inflation and excessive credit. The problem is, they often do the reverse of what is wanted. They have in the past been often unable to read the cycle.

The first bust I witnessed when young was the so called oil crisis recession of 1974, followed by the UK’s ignominious trip to the IMF in 1976 to borrow money. The country was ordered to cut public spending, to reduce its need to borrow.  I accepted the conventional explanations at the time, that the first bust was caused by the hike of the oil price, and the second was caused by bad policy in the UK. The first bust also had something to do with excessive credit leading to the need to curb inflationary pressures.

The third recession I lived through was the late 1970s  early 1980s one. This was brought on by the UK lurching from money growth and credit expansion that was too easy, to a tough money policy to purge the country of high inflation.

In the 1980s we experienced a longer period of expansion with moderate inflation. This was brought to an abrupt and damaging  end by the ill fated policy experiment of attaching the pound to the DM. This policy first took us into rapid inflation. The pound wanted to go up. To keep it down the Bank created and sold pounds across the exchanges, which came back and helped fuel over rapid money and credit expansion. In the second phase of this whip saw ride the pound wanted to go down. The Bank bought up pounds, which tightened credit and money too much and drove interest rates sky high.

From our exit from the ERM we enjoyed a good expansion with moderate inflation up to around 2004. Then the government decided on a major expansion of public spending, which went along with money growth and credit expansion. Total UK  borrowing rose rapidly.  Despite many warnings to the authorities in the middle 2000s that credit and money growth was excessive, the Bank and the government decided it was just fine and persevered with their reckless expansion. Late in the day they compounded their error by switching too rapidly and too drastically to restrictions on credit and banking liquidity, with the obvious results we saw.

Since 2009 credit and  money growth has been modest, compatible with some growth and low inflation. This has been arrived at  by tough restrictions on banks making more advances, coupled with extraordinary money creation and  bond buying.

Today the Bank needs to be careful. Money and credit growth looked about right  before their latest expansionary package of QE and lower rates. They need to remember that they have a twin duty – to keep inflation down as well as to promote activity.

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Forecasts and reality

The government has announced that it will make all the payments to farmers, universities and others that the EU is making once we leave. I am glad they have done this. The Leave campaign pointed out we can afford to do so and asked that the government did just that.

Some of the commentary has been bizarre. Trying to turn it into a bad news story, some have suggested that means we will not have the £10bn net contribution to spend on our priorities after all. This picks up an endless confusion some Remain supporters tried to create before the vote. Let’s try and explain it again. All the money the EU pays to UK farmers and others from the EU budget is all money we send to Brussels as part of our gross contribution, and receive back later as payments. This is the main difference between the gross and net figure. The net figure is what it says – the amount of money we send and do not get back at all. Once we are out we can spend that money as we see fit – or give it back in tax cuts to taxpayers – as we no longer will have to send it to the EU to be spent on the continent.

Leave made very few forecasts. Remain specialised in them. Their short term forecasts included rising interest and mortgage rates. Instead both have come down. They included stock market declines. Instead the UK markets have risen.  They included a short term recession. This looks unlikely. They included large falls in house prices. So far there has been little change. The RICS in its latest forecasts  now expects a resumption of house price growth over one and five years.

As one of the people who spent time in the referendum campaign saying I thought they had grossly overdone the gloom, I am pleased to see retail sales up and  mortgage rates down.  It was good to see both the Bank of England and the IMF produce post vote forecasts that assume UK growth this year and next. It was also interesting to see the World Bank scale back its pessimism and now say Brexit will lead to just 0.1% off world growth.

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Entryism and political parties

One of the freedoms we enjoy in the UK is the freedom to join a political party of our choice, or to ignore them all if we wish. Some of us wish to be very  active in our democracy, others wish just to vote or occasionally join in the public debate as they see fit. Some do not participate at all.

The process of joining a political party is normally very easy. You get in touch with the one you like, through their national or local office. They send you details of the costs of membership and you pay and join if you wish. There is no form to fill in about your  views, no formal  interview to test out what your beliefs and opinions are. Parties tend to the view that people only join them if they are broadly in agreement with them. Parties assume people interested enough to join are sufficiently aware of the main propositions their chosen party stands for.

Various parties do have rules about not belonging to a rival party at the same time, not acting to undermine the party’s candidates in elections, and not saying or doing things that reflect badly on the party. Each party has a reputation to maintain. Parties wish to be welcoming and usually want more members, but do see that if someone has a chequered political past they may need to veto their membership or seek promises about future conduct. There is a difference between someone changing their mind and converting to a different party’s general view, and joining with the intention of trying to make the party joined like the one the person has just left.

Entryism has become an issue in the modern Labour party, raised by the party’s own Deputy Leader in an unusual public attack on the leadership. The concern is that people who  belong to another party or ginger group like the  Socialist party or the Alliance for Workers Liberty  or the Communist party may join Labour in numbers to push its agenda into line with the agenda of their real party or lobby group. This is not an easy matter to deal with. Some on the left would say these pressure groups are entirely legitimate and form part of the Labour family. Others think they are out to subvert their view of what Labour is and stands for. The rules are meant to stop anyone belonging to  both the Socialist party and Labour., for example.

If those who wanted out of the EU had joined the Conservative party en masse in recent years instead of joining and promoting UKIP they would have been welcome, as long as they did not also hold views that the Conservative party strongly ruled out . They might have helped change party policy towards the EU more than we managed anyway. Personally I would have had no problem welcoming mainstream UKIP supporters who simply wanted the UK to leave the EU into the Conservative party, as that view was a popular view within the existing Conservative party. They could not of course have at the same time continued with UKIP membership or sought to promote UKIP candidates.

What do you think a party should do to attract the right members and avoid the wrong ones? Or are there no wrong members, other than law breakers?

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William Cash and a German led EU

William Cash has recently published a good book on the evolution of the EU, entitled From Brussels with love. With his co author Radomir Tylecote he charts the rise of the idea of a political union in Europe from its origins just after the end of the 2 nd World War. He also delves much deeper into German history and thought to establish the origins of Germany’s idea of technocratic government, on very different lines to the Anglo Saxon impulse to democratic and majoritarian rule.

It is a useful source book to understand why Germany twice tried to create a wider united Europe by force. It shows  how  the peaceful bureaucratic approach to European Union shares some of the same aims but seeks to achieve it by very different means.  The emphasis is on the elite class of politicians, senior officials, leading business people, leading academics and opinion formers coming to an agreed view of the world and ensuring it prevails.  The peaceful version of this that underlies the EU rewards all those well educated and insider people who are willing to go along with the group think and are prepared to promote a wider Union.

Reading the book reminded me of the frequent conversations and meetings I used to have to have with Germans  in the run up to the creation of the Euro. They were quite sure they could persuade me of the wisdom of the scheme, as they hoped I was intelligent and well educated like them so would be able to see it from their point of view. I always seemed to disappoint them. They never engaged in trying to understand the  very  grave reservations I had about the wisdom of embarking on a single currency without a political union to back it up. On one occasion when I argued that a large majority of the German people wanted to keep the Deutschemark, they summed up the attitude Bill describes. They told me the polling of the business and government elites showed 70% support for the Euro scheme, so it would go ahead regardless of the 70% of the German voters who disagreed.

Bill’s book offers many useful insights into the longer term history of the EU project. It also reveals much about the German governing mind, and its different approach to our democratic clash of opinions.

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The paradox of the take over of the Stock Exchange

One of the oddest features of some experts in the City is they worry about the impact of leaving the EU but say nothing about foreign take over of the Stock Exchange. When it comes to Brexit they take a dim view of how the rest of the EU is likely to react.

As they fear retaliation against UK service trade on Brexit, shouldn’t  they should fear retaliation against us even more if we  allow foreign take  over of one of our crucial service sector assets? I think they exaggerate the ability and willingness of the 27 to damage our service trade, as they need access to London and will see passports are two way affairs.

However, it is true that the EU has been trying to move trading in Euro into the Euro area. Inside the EU we have tried to resist this policy. We did  not get agreement from negotiation. We only won last time because we went to court, and they ruled that the ECB does not currently have the power to do it. That could change whether we are in the EU or not.

The Stock Exchange controls various crucial London markets, from main board shares through Aim smaller company shares to bonds and  derivatives. If we allow overseas  control of a merged  body, what ability do we have to stop the new owners seeking to switch business from London to Frankfurt? How long would any assurances that London will remain the larger market and the HQ last for?

There are good competition grounds to refer the planned merger and consider blocking the bid. The two markets combined will have large shares of EU equity and bond trading. There are issues about access to capital especially for smaller companies.

Mrs May proposed  a new policy to protect important national assests from foreign take over. How does the Stock Exchange fit into  the new policy?

John Redwood

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Mortgages and home buying increase

In June 34,300 first time buyers took out mortgages, an increase of 17% on June 2015. Total mortgages were up 12% on June 2015, despite a big drop in Buy to let. The BTL fall was  in response to higher Stamp duties and government discouragement. So we now know the run up to the vote and the uncertainty  it was said to cause did not put people off buying a home, nor did the result published with a week to go for the month’s figures.


Today comes news that surveyors have revised up their expectations about house prices, with them now forecasting increases everwhere save London and East Anglia. Thats quite a change from Mr Osbornes referendum forecast.

Many people are quite happy to buy things now, despite all the negative mood music in parts of the media.  The largest cost in my annual budget is the cost of government. My tax bill well exceeds my food bill, or  my clothing bill, or my home costs or  my car running costs. Indeed, my tax bills  exceed all of those together.  It’s the one bill I can’t control.

Helping keep three governments, EU, national and local is an expensive business. I welcome the fact that we have recently voted to discontinue one of the three. Saving the money we send to the EU or spending it on our priorities will help.

I was hoping that as some businesses and forecasters are pessimistic there would be a few bargains around. When I came to buy a UK car to replace my older one, I found myself on a waiting list as they had no surplus stock or early production capacity available. When I wanted to buy a UK made  replacement window to improve the heat insulation of my home I too was told there was a long delay before they can fit in making  the one I needed. There were no special bargains on fears of the referendum. I will wait for the deliveries , as they are good products.

So how is your consumer confidence? Have any of you cancelled or deferred purchases recently, or do you think now is  a good time to buy?


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  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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