More about getting out of the economic mess

Yesterday on both sides of the Atlantic there were hints that the current programmes of quantitative easing – printing money – will be the end of it. Both the Fed’s statement and the Governor implied that the existing sums pledged will be enough in their view.

In the UK the Governor also attacked the government’s public spending and tax plans.

“We are confronted with a situation where the scale of the deficits is truly extraordinary. This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path which wasn’t sustainable and a correction was needed”, he said.

The Governor is proving to be a shrewder politician than he has been a central banker. He may have misread the cycle badly, allowing too much money in 2003-6 and too little in 2007-8, but he is reading the political cycle well. He understands the forces that now are pushing us to lower public spending after the next Election, and realises that the special measures taken to ensure the sale of enough gilts this year may not be possible again thereafter. He is siding with the Chancellor and the Leader of the Opposition against the Prime Minister, and is even daring to criticise the PM for the size of the defict he built up as Chancellor in the “good times” before the crash.

On Tuesday I asked the PM what plans and timetable he had to reduce the deficit and end quantitative easing. I needed have bothered. I was treated to the usual highly politicised answer about the government doing what ever it takes, and the usual false contrast between the government who wants a recovery and an Opposition which wants cuts. The PM is now a parody of himself.

My question was a perfectly reasonable one. It is the question most economic commentators and market participants are asking. It was neither loaded nor party political. There ought to be an official answer to it, but the PM cannot bring himself to provide one. Instead he falls over his crude party politics, and seeks to underestimate everyone else’s intelligence. I suspect the true answer is that QE will end shortly when they have spent the £125 billion, and the deficit will be cut by a crisis Cabinet meeting immediately after the Election.

Meanwhile, the government moves on without the PM. You can feel power falling away from him. The UK establishment knows the deficit and current public sepnding levels are unsustainable. They realise that any incoming government after an Election will have to control public spending much mroe successfully than this one. The pity is we have another possible eleven months of spend and borrow on a huge scale, making the inevitable correction that much more difficult, and pushing us even further into debt than we need go. We feel the price of his soundbites on our shoulders.


  1. eeyore
    June 25, 2009

    It’s often suggested that Mr Brown, despairing of the next election, is now determined to pull the pillars of the temple down about him, and leave so catastrophic a mess behind that it will be beyond the powers of man to clean up. Have you any observations, Mr Redwood?

    1. jean baker
      June 25, 2009

      Many believe the government operates under Mandleson’s directives and that he was seconded from Brussels to run Labour from behind closed doors. Brown appears as the ‘punch bag’, acting PM, but does as he’s told. His response to John’s very pertinent question illustrates he evades answering the simplest question. He acts like a ‘non thinking pre recorded android’.

    2. Stuart Fairney
      June 25, 2009

      I have to agree, scorched earth.

      As Mr Cameron said yesterday “The PM is not a big enough man to admit when he has made a mistake”

  2. alan jutson
    June 25, 2009

    Interesting that most of the true facts now emerging are coming out from Select Committee interviews.

    It would seem that whilst there is no proper debate over these subjects in the House of Commons, I guess because there is either not enough time, or you get the childish responses from senior Ministers to a sensible question. The Select Committees seem to be working reasonably well (although would be even better with more expert knowledge from the questioners), they are even now getting some press coverage.

    Are there more meetings being held by Select Committees than before, or have Politicians at last found a way to get some sensible information out of people, and into the public arena via a different route.

    Clearly the Governor of the BOE has made some good points not only about debt, but also about new regulation, and the fact that he has not yet been consulted, but that he hopes to be.

    Yes I think the truth about Mr Brown is begining to dawn on many now, you cannot spin and refuse to answer questions for ever.

  3. Mike Stallard
    June 25, 2009

    Three good things:
    1. George Osborne’s excellent statement on his plans to increase the power of the Governor. If he means this, we could get back to the days of the “Ken and Eddie Show” of blessed memory.
    2. If – a big if – Peter Mandelson is, as Dan Hannan says, simply an EU supporter, then, after the Irish referendum, he could stop propping up Gordon Brown. That could mean an autumn election……
    3. At last, we, the great British public, are coming round to seeing that our free lunch attitude has got to come to an end very soon and that we shall have to get round to repaying our debts. This transformation is very clear on “Deal or no Deal” where most people confess, about half way through, to being driven there by their debts which usually seem to amount to tens of thousands of pounds.

    1. Denis Cooper
      June 25, 2009

      Sorry, but it’s very unlikely that we could have an election this autumn.

      The Irish government hasn’t finally confirmed it, but the most likely date for the repeat referendum in Ireland is Friday October 2nd.

      Even if the Irish vote “no” again, it will be too late in the year for us to have a general election.

      If they vote “yes”, the final obstacle to the Treaty of Lisbon coming into force will be ratification by the Czech Republic.

      There’ll probably be another appeal to the courts, and after that has failed (as it almost certainly will) President Klaus may able to delay signing off the treaty for some time.

      Although it would be unreasonable to expect him to do so until June 2010, the latest date for our general election, because he’d come under tremendous pressure from all sides – internally, and from other EU governments, and from the USA as well.

      Cameron could help him, by promising that even if the treaty had come into force he would hold a retrospective referendum – which would give Klaus a very strong argument for delaying his signature, in the interests of avoiding the problems that British abrogation of the treaty would cause for the EU and all its member states.

      But there’s little chance that Cameron would make that pledge; so at some point the Czech instrument of ratification would have to be deposited in Rome, and then the treaty would come into force on the first day of the following month.

      After that, the Lisbon Treaty would be in force, so we could have our election in the spring, and Cameron could become Prime Minister.

      1. Mike Stallard
        June 26, 2009

        You are, of course, right! Only wishing….
        But, as we both know, the treaty is being put into practice as we speak. Foreign policy and diplomatic niceties, the fix for the new President, the appointment of the Commissioners, the Europolice and the Justice system, including extradition, are all in place already.

  4. Jim Pearson
    June 25, 2009

    I’m no clever clogs, but Brown’s delaying tactics coupled with his insistance on attacking Tory policy( his idea of their policy ), sounds good to blokes on the dole. Those I talk to are distrustful of Brown, but will probably still vote for him. Your education on financial matters have given me great insight into how countries work. I agree with alot of your opinions and conclusions, but Brown still has a rump tribal vote prepared to back him. There won’t be any real loss of support I think until the jobless figure gets higher. Perhaps the governors comments will embrasses him today, but his mantra will go on. I long for an election so that I might express my opinion on Labour’s record in office. I just hope I get it!

    1. jean baker
      June 25, 2009

      Brown’s ‘rump tribal voters’, coupled with the unemployed, put Labour at the bottom in recent polls.

      The finance providers – hardworking taxpayers – have two simple choices at the next election – increased state control, oppression, rising debt and dishonesty – Labour – or de-centralized, democratic Conservative government which supports freedom of speech, choice and free enterprise, not ‘Federal Europe’.

  5. figurewizard
    June 25, 2009

    Eventually ‘Tory cuts’ will be seen as having been the last shot in Brown’s locker. Not only is he no longer supported in this by many in his own cabinet; crucially including his own Chancellor, he now faces condemnation of his economic management from the governor of the Bank of England no less.

    It is not surprising therefore that his performance yesterday in the House during PMQs was that of a desperate and isolated man, abandoned by his colleagues with nothing left to answer the opposition. What price a general election by the end of October then?

  6. Waramess
    June 25, 2009

    Notwithstanding his formidable reputation as an economist, King has proved himself to be entirely worthless in that regard and you are kind to bestow on him the dubious merit of being a good politician.

    Even King can now see that the wilful and reckless spending of this government will lead shortly to increasing interest rates.

    Under these circumstances interest rate movements can be quite robust

    Companies will need to increase dividend levels in line with interest rates or see a rapid decline in their share price, homeowners may no longer be able to meet mortgage obligations and so on and so forth.

    Looking pretty nasty and still the fool wants to grow the economy out of debt.

    1. jean baker
      June 25, 2009

      At the time King mentioned the word ‘recession’, the BBC (amongst others) were prohibited from broadcasting the ‘word’, the reason given that the public may find it upsetting, or some such excuse.

      King’s been very quiet since then. Perhaps it simply suits Labour’s purpose to use King to give forewarnings they prefer not to announce themselves, i.e. interest rate rise.

  7. Stewart Knight
    June 25, 2009

    Pie in the sky musing…but….

    Wouldn’t it be delicious if the Conservatives refused to put any candidates up in anything other than safe seats and put Brown back into Government and see what he does then? All that rhetoric…all that guff…all those lies, and I bet another election would soon follow.

    1. James Morrison
      June 25, 2009

      I have to say that I am tempted to vote Labour, purely to try and force them to own up to, and clear up, the mess they’ve made. The one thing holding me back is that I fear they would somehow continue to make things worse.

      Either way, I won’t be wasting my vote on the Tories and their “Heir to Blair”.

      Unless (and until) the proper conservatives (small ‘c’) like JR are given bigger roles in the party, I do not believe they will offer anything very different to what we have now, or worse, what we had with Blair in charge.

      1. jean baker
        June 25, 2009

        David Cameron supports the principles of democracy; Bliar is ‘killing time’ at vast expense to taxpayers waiting for the EU Presidency – EU’s aim being a Federal State.

        The men are ‘polar opposites’.

        1. James Morrison
          June 26, 2009

          Yes, admittedly there are obvious differences between Blair and Cameron, Europe being one (though I am not convinced that when push comes to shove, DC will actually want the UK to resign it’s EU membership, but that is purely my opinion). Don’t forget, it was David Cameron himself who described himself as the “Heir to Blair”.

          It seems to me that the Tories are still somewhat split over some issues. Issues such as grammar schools (DC is certainly against them, favouring the disasterous comprehensive schooling system), marital privileges (tax breaks etc) and political correctness, to name a few, and DC comes across on the left-wing of all these issues. Plus, of course, he voted in favour of Blair’s war in Iraq.

          I could be wrong, but I cannot find information on any laws that have been introduced by Labour governments which have subsequently been repealed when the Tories regained power. This country has been steered in a left-liberal/socialist direction since the 60’s, and DC is unlikely to be the person who would make any radical changes to that.

        2. jean baker
          June 26, 2009

          De-centralization, locally controlled democracy is the main difference between David Cameron and Blair’s aims which he passed to Brown.

          You appear to have no recollection of the ‘winter of discontent’, nor the economic mess Mrs Thatcher inherited – Labour had reduced Great Britain to a ‘laughing stock’.

          Economic growth was at 12.5% when Blair was elected; latest reports are growth diminished to – 30%.

          Borrowings at taxpayers’ expense continues to fund PFI’s and other increasingly state controlled public services.

  8. DBC Reed
    June 25, 2009

    Never been clear how quantitative easing creates government debt. The gov buys back the gilts and cancels them does n’t it?And the gov purchases them with entirely new quantities of money? Does n’t seem any point to it otherwise.

    1. Denis Cooper
      June 25, 2009

      1. The Bank of England creates new money and buys up existing gilts from private investors.

      2. In parallel, the Treasury’s Debt Management Office sells new gilts to the private investors.

      3. So now in effect the Treasury has the newly created money, which the government will spend, while the Bank has the previously issued gilts and the private investors have the newly issued gilts.

      4. Therefore the government is not only indebted to the private investors in the normal way (because it has sold them new gilts), but abnormally it is also indebted to the Bank (because the Bank bought previously issued gilts from the private investors – at the moment, to a face value of about £90 billion).

      5. So the government must pay interest, and finally repay the capital, to both the private investors and the Bank.

      6. Could the gilts held by the Bank simply be cancelled? That thought did occur to me, but on further reflection it would leave a massive hole in the Bank’s balance sheet – the Bank has issued “promises to pay” in the form of new money, and that debt has to be balanced by the assets it purchased.

      7. However, it may be possible for the government to pay the Bank in gilts, rather than cash – effectively rolling its debt over into the future.

      1. Waramess
        June 26, 2009

        I believe the original idea was not for the Bank to buy Government debt to fund new Government spending but for the freshly printed money to flow on directly to the commercial sector through the conduit of the banking system to ease the effect of the credit squeeze.

        You are right however that the government seem to have conveniently changed the already flawed economic thinking behind QE with the result that the BofE now prints money to buy gilts, effectively and almost directly from the government.

        Monty Python is still with us.

        1. Denis Cooper
          June 26, 2009

          Yes, originally the Treasury was going to provide the Bank with taxpayers’ money to buy commercial assets; that had barely got started before it was agreed that the asset purchases would be funded by newly created “central bank money”, instead of taxpayers’ money, and would include both commercial assets and gilts; but in fact since then only about 3% of the newly created money has been used to buy commercial assets, and about 97% has been spent buying up gilts.

          Quantity of assets purchased by the creation of central bank reserves, as of June 25th: £99,094 million.

          Which break down as follows:

          Commercial Paper £1,950 million
          Corporate Bonds £776 million
          Gilts £96,368 million = 97% of total

    2. Mike Stallard
      June 25, 2009

      I found this very helpful, so I pass it on to you:

      1. Denis Cooper
        June 26, 2009

        Yes, it’s good, and should be widely circulated.

  9. Josh
    June 25, 2009

    A little harsh on Mervyn maybe? He voted for rate increases through 04-05, but because of the OMOV system of the MPC, he was overruled.

  10. Christopher Quinton
    June 25, 2009

    While Brown continues to be in denial about spending cuts (and I suspect this will continue) isn’t it time that the Conservative Party started hammering home the message about the huge amount of waste, bureaucracy and the massive number of inefficiencies in the bloated public sector?

    Arguments about which party will spend more, or make fewer cuts is irrelevant. It is how the money is spent that is important. If it is spent well – delivering more services for less money – this is where the true argument for turning the economy round lies.

    When will the party take up this cudgel?

    Best wishes,

      June 25, 2009

      It is how the money is spent that is important….


      We take this further opportunity to agree again and repeat:

      1. How dare they continue to boast about how much of OUR money they are spending – and wasting!


      The proof that Brown is an ‘analogue’ politician in a ‘digital’ age is in his refusal to move with the times and the public mood on his ridiculous ‘10% cuts’ and ‘we’ll outspend the wicked Tories’ strategy, so ably abetted by the Chancellor he wasn’t allowed to
      JR hit it on the head again – the man’s become a parody of himself!

  11. Lola
    June 25, 2009

    I reckon you must have the patience of a saint. One more of those Brown ‘statements’ and I’d’ve been very tempted to leap over the benches and clock him one.

  12. oldrightie
    June 25, 2009

    “Instead he falls over his crude party politics, and seeks to underestimate everyone else’s intelligence.”

    My new collegue at “oldrightie” has produced an excellent spoof of Brown’s deluded nature. Would go well with this excellent, as ever, piece. We shall have it up some time today.

  13. Javelin
    June 25, 2009

    Brown has acted perfectly rationally there is no conspiracy. He built up the infra structure of his beloved Scotland during the good times based on Southern money. What is ironic is that he couldn’t even manage that properly and SNP have taken over.

    1. DavidB
      June 28, 2009

      He has no “beloved Scotland”. He wraps himself in the Union flag, and is as Scottish as it suits him for electoral purpopses. You have to agree to keep him or we’ll refuse independence. 😉

      1. Robin
        June 29, 2009

        I have a book on football at home (can’t remember the name) where Gordon has written a chapter and sings sweet praise of his “beloved Scotland” and how happy he was at beating England.

  14. jon
    June 25, 2009

    What a fallacious machiavellian he is. Whilst he won’t answer the questions atleast anyone watching can see him trying to deceive people everytime he responds.

    Yesterday, other than PMQs we had Mervyn King and the OECD, there will be more reports from the IMF, EU Commission, IFS and so on that he will have to oppose. He looks ridiculous now, how stupid will he look in 6 months time.

  15. Neil Craig
    June 25, 2009

    The curent recession is entirely because of politics. We could not only get out of it but into China style growth any time the politicians decide to spend less of the nation’s wealth on paper shufflers & to let the free market work. The Conservatives will certainly be better at this than Labour & the LudDems. Whether that means they will be any good at it is a different question.

    1. adam
      June 25, 2009

      they dont want growth. its called sustainable development

    2. Stuart Fairney
      June 25, 2009

      Exactly right ~ again.

      Your own blog is fast becoming required reading along with Guido and JR

  16. TomTom
    June 25, 2009

    The huge increases in oil prices show the effects of debt-monetization or QE as it is fashionably termed. The speculation in oil and commodity markets is ensuring stagflation. Why the banks were not brought to heel is unclear. Traditionally I-Banks rewarded traders at the expense of shareholders, now we have commercial banks being as disastrous for investors as I-Banks.

    Brown was easily rolled by the Bankers’ Ramp and is surely a worthy successor to “Iron Chancellor” Philip Snowden who was rolled over in 1931. It is amazing how Labour has done it all over again ! Brown is simply out of his depth chanting mindless mantras as if in a trance. He really has not a clue.

    An incoming government must call and emergency meeting of Cabinet with Shadow Chancellors present to go through the books and make public the disaster Brown Labour has left….then it will be a question of emergency budgeting. Healey had budgets every 90 days and slashed infrastructure spend….which made privatisation inevitable to get investment spending back on track.

    The Public must have full information on the situation. No more lies and deceit

  17. Demetrius
    June 25, 2009

    I remember the late 1940’s when the deficit was so large that the whole population were faced with shortages, lack of money, and high taxes. I remember being hungry, cold, having to do with old clothes and hand me downs, and the endless struggle all families faced to keep going. At least we just about got through, there were places in Europe where many starved. That was after a major war which had wrecked the economy. Unless the government begin to face reality and truth this is what the future could be. The trouble is that we have neither the community nor the shared experience that held that earlier generation together.

  18. Dorothy Wilson
    June 25, 2009

    I do like Tom Tom’s suggestion of an incoming Conservative Government going through the “books” with the Shadow Chancellor present to highlight the mess Brown has left behind. At least this would stop Labour rabitting on about “Tory cuts. Perhaps Brown himself should be invited to participate in the scrunity.

    Of course, it might just be a LibDem Shadow Chancellor by then!

    1. alan jutson
      June 26, 2009

      Be good if it was in Public, so we could all see the real mess we are in.

      Good idea, Public Inquiry into how the UK got into massive debt.

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