In recent weeks the value of the pound has gone down. The government’s cost of borrowing money has gone up.

               Maybe the authorities are happy with the first of these changes. They are keen to create more money. That is always likely to lower its value. The pound has fallen from $1.63 to $1.56, and has also fallen against the Euro.

              The authorities will see this as evidence that the  Quantitative Easing is working. They might also hope it will lower imports and boost exports.  Last time the devaluation tended to boost profits more than the volumes of exports, as some companies took the advantage of the devaluation with higher  prices rather than volumes of exports.

               The danger is that a further devaluation can boost inflation. Ever since the crisis hit, private sector incomes have been falling once adjusted for rising prices. Inflation has ben higher in the Uk than in Japan, Germany and the USA. As we import such a large proportion of our needs, we are vulnerable to a falling currency. It makes things dearer and cuts the value of our pay.

               The authorities are probably not so happy with the rise in the cost of government borrowing. Despite the large bond buying programmes of the Bank of England, the cost of ten year money for the state has gone up from 1.5% to 2.1%. It’s still a low figure by historic standards, but it is a 40 % rise in the interest cost. As the state still plans large deficits for the next couple of years, and has record levels of debt outstanding, this is a problem to watch carefully. On £1.1 trillion of debt every 1% increase in the borrowing rate matters  as the debt comes to be refinanced at higher rates.

           In 1971 the USA decoupled the dollar from gold. From that day onwards inflation rose rapidly in many parts of the world. Whilst it is perfectly possible to enjoy monetary discipline without a gold standard, the Central Banks and governments of many major countries could not resist the temptation to allow more credit and money to circulate, which led to more inflation.

            This tendency was particularly rife at times in the UK, especially in the 1970s. Inflation in the UK since 1971 has averaged a very rapid 6.2%. You would need £12 now to provide the same value as £1 in 1971. The value of money has fallen by a massive 92%.

              The rate of fall in our money was brought down from the very high levels of the 1970s, but has remained quite high by international standards. In the last two years inflation has averaged 4.2%, taking the value of our money down by another 8%.

             There is little evidence to support the idea that a higher rate of inflation produces more growth. Indeed, the recent inflation has eroded real incomes and made it more difficult to generate a private sector led recovery. When inflation was out of control in the 1970s, the UK economy performed especially badly, with a recession and a trip to the IMF  to borrow to keep the country afloat.

                Mr Carney the new Governor of the Bank of England  may well wish to produce a monetary policy which fosters more growth. He needs to also be aware of the tendency of the UK to too much inflation. I suspect he will wisely decide to keep the inflation target. He should also ask why it has been missed so much in recent years, and ask whether better control of inflation might not be part of the answer to instilling confidence and encouraging more growth.

             Dropping the inflation target gives him no freedom he does not enjoy anyway, given the way the Bank has behaved in recent years. It would, however, worry some people in the markets in a way which would be unhelpful. Making it more flexible may be more honest than the present regime has been over the target, but implying it is not being taken seriously at all would also be an unwise move.

           The EU has agreed a 7 year budget settlement lower than last time.  The UK Parliament  passed a motion requiring a reduction. The UK has negotiated  a reduction.

             The last  ceiling was Euro 943 billion. The Commission with various countries in support wanted to increase this to Euro 988 bn. Instead they have now agreed a cut to Euro 908bn.

             So the settlement is Euro 35bn than the previous one, and Euro 80 bn below the original proposal.

            If the Prime MInister had persisted in using the veto on this they could have resumed annual budgets by majority votes. The agreed settlement is Euro 60 bn below what they could spend without an agreement.

            I am glad the Uk dug in, and glad that for the first time the budget is coming down instead of going up. Of course I would like a lower budget than this. I do not think the Prime MInister could have got  more by threatening further use of the veto.

           The worst news is that the UK contributions will go up, thanks to the reckless way Mr Blair gave away part of our rebate. Mr Cameron refused to give up more of our rebate, though he was under pressure to do so.

I looked up the forecasts for the revenues from self assessment  Income Tax before my lecture last night.

In June 2010 the Budget forecast for this  tax revenue for 2011-2014 was a very useful £85.9bn.

In the Autumn Statement 2012 the forecast for the same time period was just £66.7bn.

That’s £19.2 bn down, or a loss of 22.3%.

They got the growth rate of the economy wrong, and the underestimated the way higher rates depress revenues.

            There has been debate recently over whether an MP should vote for a personal view, or should seek to represent his constituents. People often say they like “independent” MPs, MPs who will disagree with their party where necessary. They say they like an MP who represents his constituents. On many issues constituents are very divided and hold a wide range of contradictory views.  People also vote in very large numbers for leading parties, recognising that is the way to influence who governs.

             Let me try and shed some light on how an MP forms his or her decision. The MP’s personal view, if he or she holds one at all on an issue, is not the most important consideration, and can  often be irrelevant. Indeed, if the MP holds a personal view based on  his or her personal interests, the view has to be ignored or suppressed. An MP should not be using public office to further a personal agenda.

               An MP should ask what is in the national interest. He should ask what is his party’s view? What did he and his party put as their view at the last Election? What is the view of his constituents – is there a strong or majority view? Is that view in agreement or disagreement with his party’s view? 

                  When you first become a candidate you discover you need to have views on a wide range of topics you had little considered before. One of the great interests of the job as an MP is the huge range of issues, often quite detailed, that people expect you to take an interest in or to have a view on. Belonging to a  large party can help. Your party will have experts in most topics, and will have considered many of these issues. You may find the party view on a matter you do not know much about is just fine, offering you the back up you need on the topic. As you  become a more experienced MP you gain confidence in your knowledge of a wider range of issues, and learn more of the limitations of some party positions. You are also in a position to seek to influence or change your party’s view.

                    The “free vote” issues are ones where the main parties agree to disagree amongst  themselves and leave it to candidates and MPs to have their own view. These tend to be issues where the great religions  have strong views and are often Home Office and Justice Department matters. Some MPs have strong views themselves on these issues. Others seek to reflect majority opinion or majority opinion within their local parties on these things.

                  In the current Parliament many Conservative MPs wish to be true to the principles and policies they and their party set out before the Election, despite now being in Coalition. Some decry the lack of Conservative loyalty to the leadership. Others understand that many Conservative MPs are trying to keep alight the flame of Conservatism at a time when their leaders make compromises with Lib Dems to keep the Coalition together. The Conservative rebels mirror the Lib Dem ones. It is just that there are so many more Conservative rebels, because there are so few Ministerial jobs for Conservative MPs proportionately compared to the Lib Dems.

                 An MP has access to plenty of opinion and information when making up his or her mind on an issue. A sensible MP also understands the limitations of his or her understanding and relies on others or on professional advice where necessary. I am not a nuclear scientist, so I would need professional advice on the risks and methods of nuclear generation. I am a long term student of banks andthe  financial system, so can form more of my own view of what is needed to transform the UK banking industry. MPs who specialise often are more effective. They may start with expertise from past jobs. They may increase or create the expertise by being intelligent readers and questioners in a given area of policy as MPs.

                 There are as many ways of forming a judgement about matters as there are MPs. In the end the main question should be What is in the national interest?  The important balance to strike is between the wishes of constituency, party and commonsense. A personal opinion is a luxury that may not be appropriate.

 The UK Parliament voted to cut the EU budget.

 Now I see countries who get more out than they put in saying the budget must be increased to promote growth.

Every pound or Euro they spend has to be taken from taxpayers somewhere. Why are they better at spending it than the people who earned the money in the first place? EU spending does not and is not promoting growth. The EU is in recession.

Indeed, many of the EU’s policies are preventing a proper recovery by EU economies, because they  make countries in the EU less competitive in world markets. The EU prefers unemployment to policies that promote growth – policies like cheap energy.

Just stop the build up of government debt, and let people spend more of their own money.

The UK should dig in against the budget plans.

              Yesterday there was more gloom and doom about banks, as yet more punishments were imposed for wrongdoings in the past. I know from the tone of anti bank contributions here that many of  you will be pleased action has been taken, or will be urging more and tougher action.

             I want to talk about the future, not the past. I want to ask the question, what type of banking services do we  need to fuel a sensible recovery and to meet the needs of individual and company customers over the next decade? Why have so many people fallen out of love with their banks, or moved from indifference to outright hostility?

            Most people  need a bank account to carry out transactions in our electronic world. If you need to pay the gas bill, receive your wages, or draw out cash you need access to basic banking services. People want it to be secure, swift and cheap. There should be economies of scale. Although many say they do not like or trust banks, in pratice most people most of the time do trust our main banks to keep our money safe, to settle our bills on time by Standing Order  or Direct Debit, and to send us accurate records of what we have done.

             The criticisms of these central basic services are that they can be too expensive, it can take too long to move money, and sometimes mistakes are made that can be difficult to rectify. There are second order  arguments about whether these servcies are best on line, in branches or by phone. Different customers want a differing combination of these methods of  servcie delivery. High Street banks need to get better at delivering what people want. More banks and more choice of bank, coupled with better portability of accounts would help a lot.

              Many people and companies also need to be able to borrow money. They may need money for the short term, to handle cash flow problems.  Individuals may need to borrow until  payday, or ahead of a rise or bonus. Companies may need to finance working capital, awaiting payment by customers or movement of stock.

               They may need money for longer term investment. Most individals need a mortgage to buy a house. Many companies need money to buy a property or to finance plant and equipment.

               Today there remain serious cricisims of the availabilty and price of credit. Mortgages have been in very short supply, and the requirements are now much more stringent than before. There are signs of improvemetn from a low level. Property lending for companies has all but dried up, yet this used to be one of the main forms of long term bank  financing for companies. Smaller companies report banks keen to get early  repayment of loans, and only willing to lend with large fees and charges added in.

               People and companies also may need help with investing savings and surpluses. They have other sources of advice and assistance, as the banks have found it difficult to recruit and retain the more expensive investment personnel needed to assist in most branches.

                 The banking models of the last decade created mega banks whose main products and services were directed at the larger companies.  They hired very expensive people to invent and sell ever more complex products. They did so by persuading Companies treasurers they needed various types of derivative insurance. They then extended these products to back a variety of savings and loans products, and to overlay pensions and other funds. This made big money, and enabled the staff to enjoy huge salaries and bonuses . The branches did not have empowered or expert staff to look after normal customers.

              A future bank has to accept that there will not be so much lucrative derivative, future and options business. There will be a stronger demand for more basic loans and savings products where costs are under better control. This means lower overall remuneration for the practitioners, and more service for the smaller and medium sized customer. It will need a different kind of branch banking.

    Alastair Heath has recently drawn attention to the collapse in net income of the top earners in the UK under the Coalition. The top 1% took home 11.2% of the nation’s net income under unequal Labour in 2009-10, and a much lower 7% this year under the much more equal Coalition. This fall goes all the way down through the top half of earners. The top 50% received  75% of total net income in 2009-10, and only 60% this year. Meanwhile the bottom half receives a bigger share of the income than at any time this century.

          All those who wanted a more equal society should rejoice. Indeed, they should be voting for Coalition parties out of gratitude. The Coalition has done something Labour was quite unable to do during its period in office, when the UK became less equal.

          Not everyone, however, is rejoicing. Getting inequality down by moving rich people offshore or out of the country altogether is no great success. It is easy making the top half of earners worse off, but doing so does not help the economy to improve, grow, change for the better. We need economic growth to raise all living standards. We need more jobs to rauise the living standards of those currently living on benefits.

             The government is busy trying to stop the next banking crisis. I want it to sort out the last one. It is all very well giving the Bank of England powers to force the break up or segregation of a large conglomerate bank in the future if it lends too much and runs too much risk. The real issue is how is this government, now, going to get RBS working properly and lending enough to the starved UK private sector?

             Giving the Bank of England an electric ring fence does not mean a future problem is sorted out. An electric fence warns but does not kill an animal that encounters it. An electric fence would not withstand a determined herd of animals wanting to trample it. Metaphors are often misleading. The issue in the future is would the Bank see the need to use its new powers at the appropriate time?  Would they turn the current on when things seem to be going well? The problem in 2006-7 was not a lack of power to rein in excess banking risk, but an unwillingness or inability to see the need to do it. Can you really see in the next boom the Governor going to a very powerful, profitable and successful world bank in London and telling them, he will force break up or better segregation? Why wouldn’t they just change domicile?

              Meanwhile, close at home and largely owned by the taxpayer lies the damaged RBS – becalmed  because it still cannot get rid of the taxpayer shareholding and rarely makes an overall profit. If ever there were a candidiate for break up, there is one. The government could agree a break up with the minority shareholders. The UK needs more soundly financed competitive clearing banks to finance a recovery. The government owns many of the components to do that in RBS. Why doesn’t it get on with it before it is too late to improve the economy before the next General Election?