Watch the pound

Today the pound opened lower again on the exchanges against the dollar. That means dearer petrol, dearer commodities, dearer imports from dollar related parts of the world including China. We are poorer as a result.

The MPC is like the drunk trying to walk along the pavement. They spend some of their time in the ditch of recession and falling prices because they underdo the money growth, and some of their time in the middle of the fast road, because they overdo the money growth and inflation.

Months ago I started warning they were overdoing the easy policy which was bound to lead to a lower pound and higher prices. That is exactly what is now happening. The Governor has to get ready to write another letter of apology. Why can’t they find people who can get it right?


  1. waramess
    February 8, 2010

    Yey another reason for international investors to get out, and keep out, of sterling.

    There will be a flight away from bonds where the governments might unilaterally impose a moratorium on repayments but before that they will have fled in droves from bonds where they are taking a bath on the exchange rate.

  2. Chris Goften
    February 8, 2010

    Perhaps because they are always economists with pet theories. They can only see the world through that theory. The panel should include successful business people or maybe traders who have made a living getting it right instead of academics that get paid no matter how much rubbish they talk. That's probably a good idea for government ministers too.

  3. Mike Stallard
    February 8, 2010

    Fair's fair – you did talk about this at the very height of the recession. Inflation was then talked about quite a lot. I believe Zimbabwe was mentioned in several comments.
    What is so surprising is that yesterday in the evening Radio Four actually noticed that there was a fair chance that UK might join the PIIGS! They even mentioned the remote possibility of a US default.
    Things, as they say, can only get better.

    PS It just shows that the Emperor who thought he was the Iron Chancellor has no clothes, doesn't it!

  4. Brian Tomkinson
    February 8, 2010

    Isn't this exactly what Brown wants? Devaluation, inflation, anything but cutting spending. Since the four external members of the MPC are appointed by the Chancellor we can assume that the government thinks they are "getting it right". As for writing letters of apology, that only adds insult to injury as we see these people playing out their deception of the British people. I keep wondering just why your party intends giving the BoE even more powers. Are they intent on continuing the same charade?

  5. Michael Lewis
    February 8, 2010

    This is against the USD, which isn't exactly a (longer term) great currency itself. Against the Aussie, Loonie, and Kiwi, the fall has been even more dramatic. So much so, after this recession, I expect it will be trading in a new lower range against these currencies.

    Monetry policy and interest rates are there purely to put off the pain until after an election, nothing more than that. This, from a body that is meant to be independent.

  6. JohnRS
    February 8, 2010

    ….and yet the BoE/MPC are the very people to whom the Conservatives are going to give more power. It's not terribly encouraging.

    I don't know where (or even if) there are any real experts that could be drafted into the BoE to try to get things right, but we really do need to try to find some to avoid a repeat of this too weak/too tough cycle.

  7. The Parallax Brief
    February 8, 2010

    Sorry, but this is patently constructed on a fallacy: Money growth, as measured by M3 and M4, is at a TEN-YEAR LOW, despite the quantitative easing, so how one can argue that the MPC has over done the money growth is beyond comprehension.

    Indeed, if the rate of money growth is a key leading indicator of inflation, then Britain can expect deflation, since money is actually contracting.

    There's a link below to a chart containing the seasonally adjusted rate of M3 money growth in Britain for the last ten years, but it's the Parallax Brief's own blog, so please remove it if you feel that's spamming.

    Meantime, a falling pound might well make imports more expensive, but that's a good thing! It helps rebalance our current account deficit by simultaneously discouraging the purchase of imported goods in favour of domestically produced fare, while making British goods more competitive abroad. Bad for those who want to buy BMWs and Sony gear, but good for jobseekers and factory owners.

    1. A.Sedgwick
      February 8, 2010

      The chart doesn't show on the link for me so I am unable to see where you are coming from, but regardless I doubt if it justifes the creation of phoney money.

      Brown & Co for electoral reasons needed QE to buy Gilts – the number of overseas mugs willing to see the value of their investments devalued are few. The niceties of money supply, I suggest, were not a serious consideration on the decision to pay for a year's Gilt sales.

      In the late 1960s the £ bought 12 DMs or SF, over the decades that figure dropped to 2.5 – which are the stronger economies?

      The way RBS and HBOS were "saved" contracted the money supply as JR has regularly written they need to be broken up and sold.There are glimmers of this happening with RBS selling 300 branches, but maybe the proverbial tip of what is needed to both increase their capital and lending bases.

      1. The Parallax Brief
        February 8, 2010

        First, apologies for the chart. Have no idea why it didn't show; but, the problem has been solved. Apologies again.

        Second, it's difficult to know where to start with your post. the chart doesn't justify the creation of "phoney money", whatever that means, but it intend to — and succeed in — highlighting the fallacy of the anti-QE hysteria. If QE has flooded the country with soon-to-be-inflationary money, then why has seasonally adjusted M3 money growth plummeted to a ten year low? Why is M4 growth at its low as records began?

        Then, you talk about Brown and Co "needing" QE, conveniently forgetting that the Bank of England and MPC is INDEPENDENT.

        But, as a coup de gras, the comparison between the GBP-DM exchange rate in the 60s, during which time the FDR was an emerging economy, riding high on the Economic Miracle, to the GBP-EUR exchange rate today is a stunning conflation of two separate issues, that, even if they were connected, are not even an apples to apples comparison.

        1. Stuart Fairney
          February 8, 2010

          I can't see the chart either, could you take another look?

        2. Mike Stallard
          February 8, 2010

          Do know what?
          I have long since ceased to believe any government figures and, to be quite honest, I work on the 1984 principle now almost entirely.
          Bank of England and MPC are indeed independent – but of what exactly? Last time I looked, there were quite a lot of shall we say left leaning figures there as well as banking people.
          Wouldn't you agree that if you print loads and loads of money and have a rapidly growing deficit, that sooner or later you are going to get inflation?
          The people with money to invest are going to weight all this up before they place their bets. And as far as I can see they are the people to watch, not government figures.

        3. The Parallax Brief
          February 10, 2010

          Chaps, apologies for the wait.

          The chart certainly works now. After speaking to our Webmaster, the problem was related to the switch to a new server and adding a new URL to the blog so another could be accommodated.

          Again, apologies.

    2. Sally C.
      February 8, 2010

      JR recently cited M4 as having increased from from £1,212 billion (£1.2tn) in 2004/5 to £2,100bn (£2.1 tn) in 2009. That is a 12% compound rate of growth over a five year period. Your comment was very confusing so I went to the B of E's own statistics on M4. If you look at the Bank's Monetary and Financial Statistics report published in January 2010 you will find a table setting our the monthly annualised growth figures for M4 from December 2007. The figures are as follows: Dec 2007 M4 grew at a 12.7% annualised (seasonally adjusted) rate; in Jan 2008 it grew 13.3% (annualised and seasonally adjusted); Feb 2008 12.3% ;March 2008 12%; April 11.4%; May 10.5%; June 12%; July 11.5%; August 11.5%; September 12.2%; October 15.3%; November 16.4%; December 2008 M4 grew at 16.5%; Jan 2009 M4 grew at 17.6%, Feb 2009 M4 grew at a staggering 18.8%; March 18%; April 17.2%;May 16.5%; June 13.6%; July 14.2%; August 12.3%; September 11.5%; October 10.7%; November 9.2%; December 2009 M4 grew at a reasonable 6.4% annualised and seasonally adjusted. Historically, M4 only grew at 4, 5 or 6 % so these double digit increases are not the norm and would be considered inflationary by Monetarists and Austrians.
      Re inflation, you obviously didn't see the recent Output and Input Prices Report from the Office of National Statistics. The headline statement was as follows: 'Output price ‘factory gate’ annual inflation for all manufactured products rose 3.8 per cent in January. Input price annual inflation rose 8.4 per cent in January compared to a rise of 7.4 per cent in December.’
      The most troubling figure was the month on month increase in input prices which rose 2% month on month or an annualised rate of 24%!! I am not saying that it will continue at that rate but if that figure is not a sign of worryingly high inflation down the road, I don’t know what is.

    3. Mark
      February 8, 2010

      Your chart doesn't work for me either, but according to the latest issue of Bankstats, M4 in Dec 09 was £2,057,840 million, some 22.9% higher than two years previously, having undergone particularly fast growth late in 2008 and in early 2009, before a slight contraction in Nov and Dec 09. Given the lags between M4 and inflation, we are now seeing the effects of the rapid injection of 6-12 months ago beginning to come through on the inflation numbers, and these can be expected to continue for a further year or so. The very recent M4 contraction will not counteract this for some months yet, and we have to see how M4 is managed in the next few months.

      I suspect the motivation for the contraction was an expectation that the velocity of circulation might increase as the VAT and stamp duty holidays reached last chance saloon, and the knowledge that the increase in VAT was going to produce an uptick in inflation afterwards.

  8. Lola
    February 8, 2010

    To be fair(ish) to The Govenor he's doing a job that is impossibe. Not just impossible because of the clowns he has to report to, but impossible in that he is dealing with what is essentially an unsolvable conflict.

    Thanks to the revolutions in freedom and responsibility started in 1979 governments, largely, though not New Labour obviously, have learned that they do not 'run the economy' as such. Of the tools they previously wielded to 'ru(i)n the economy' all they really have left is the price and supply of monopoly money. Sure there are various other bits they can pretend to do, but mostly that just involves taking shed loads of money from one class of not quite totally screwed people and giving to another class of slightly more totally screwed people, hence guaranteeing wealth destruction.

    Given that the money price/supply is all they have left, and that if they increase the supply they destroy Sterling's value or if they raise the price they destroy enterprises they are in a bit of a cleft stick.

    The Govenor has made it as plain as he can that the only way out of new Labour's mess is to cut government spending savagely. To which I would add slash taxes. He won't say slash taxes because he's a banker, but as a central banker he should.

  9. Stronghold Barricade
    February 8, 2010

    I had believed that part of Gordon Brown's arsenal of ways to combat the deficit was to "inflate it away"

    Supposedly it makes British Industry much more competitive, although I have yet to see any clear figures demonstrating that our exports are up whilst our imports are down

    So how will conservative policy differ?

    How will you radically overhaul the MPC, or will you abolish it?

  10. […] After egregiously criticizing the Bank of England’s Monetary Policy Committee (MPC), the committee responsible for conducting the United Kingdom’s monetary policy, John Redwood — astonishingly — piles right into an attack on a weakening pound: […]

  11. backofanenvelope
    February 8, 2010

    I have to say that I thought the task of the MPC was to manipulate the interest rate to ensure the inflation rate was stable at the level set by the government. As they have now got the rate down to almost zero they don't have much manipulation room, do they?

    And of course, they are faced by a government that is hell bent on increasing inflation. Mission impossible indeed.

    1. Giles
      February 8, 2010

      No, monetary policy is about more than interest rates. Read Scott Sumner's blog. It is about the whole forward path of money related to expected output, at the least. Affecting expectations is a big part of it.

      If the government were hell bent on increasing inflation, it would have done more than just temporarily lend money to the gilt market. If only it HAD done something slightly more interesting. Damp squib, as I put it in my blog.

  12. […] points will be awarded for anyone including a discussion of the pound sterling, as mentioned on John Redwood’s blog, and how it has in fact risen by 10% against the dollar since  QE began . . […]

  13. Mark M
    February 8, 2010

    And what's worse than useless people having the job, because El Gordo didn't want the responsibility of a failed economy and made the bank a quango, there's nothing we can do about it.

    Time was when a government failed to control inflation we booted them out at an election. Not any more. The buck has been passed, thanks to the Great Ditherer.

  14. Giles
    February 8, 2010

    But the pound has risen since QE began, and has fallen since it's end became apparent!

    The Bank does not seem to be controlling the value of money with any great skill. But putting it on a pathway that would encourage economic activity in the short run seems sensible, unless you don't think we have deficient demand. Wasn't a weak pound useful in 1993-5? What is Conservative policy on this – one minute George Osborne warns of a sterling crisis, the next minute* he is urging greater exports and monetary ease . ..

    *Ok, the minutes were in Nov 2008 and Sep 2009, respectively. But you get my drift.

  15. Citizen Responsible
    February 8, 2010

    At the end of last year, the CEBR chief predicted that if Labour began to close the gap in the opinion polls, sterling would suffer. This is now happening.

  16. Chuck Unsworth
    February 8, 2010

    It's not a question of finding people to 'get it right'. It is a question of finding people with real courage and real understanding – both are required and both are quite rare.

  17. Martin
    February 8, 2010

    Until such time as excessive consumption (especially in the public sector is curbed) I'm afraid the Pound will continue to be weak.

    Luckily (or maybe not) for the Pound Greece is in the firing line at the moment. A country beginning with U might be next.

    I find it hard to believe anyone can support a weak currency as a policy objective. We have seen the Pound drop from buying €1.40 to €1.14
    What good has this done us? Did I miss a great surge in exports/drop in imports or the dancing in the streets? The UK's trade deficit remains bad.

    Maybe for Greece the benefit of being in the euro will be that its' problems will be tackled out before the devaluation junky that is the UK.

  18. Norman
    February 8, 2010

    The US are also borrowing / printing money at an extraordinary rate – $1.5 trillion deficit this year, more than tripled in a year – so it will be interesting to see what effect this will have if the situation continues to deteriorate with them.

    I heard one commentator saying that he feared China would impose restrictions on their borrowing much as the EU are doing with Greece but I suspect he was just rattling cages. No one expects the US economy to do anything but grow it's way to recovery but their borrowing is becoming a problem.

    Where else can money go? Finance isn't my thing and doesn't interest me other than when it affects me but it will be interesting to watch developments over the next 3-5 years.

    1. Mark
      February 9, 2010

      The US has at least allowed its house price bubble to continue to deflate. For that reason alone, they are much closer to being able to see some light at the end of the tunnel than we are, with over £300bn spent on propping up house prices so far.

  19. Mike Stallard
    February 8, 2010

    "Saturday's Express reported that British banks have nearly £100billion staked in debt-laden Greece, Spain and Portugal, and if any of those countries defaulted on their debt, it could create a black-hole in those banks' balance sheets." (Open Europe).
    And, of course, this £100,000,000,000 would be guaranteed by the government – our taxes – and it might well push us over the edge.
    Hello Mr Mugabe, could you spare some Aid?

    1. alan jutson
      February 9, 2010


      Every which way you look it seems to get worse.

      This is the problem when you guarantee to underwrite a Bank with overseas investments/loans and the like. The final risk is almost impossible to value. Just as you think you are nearing the end (and we are not) of the liabilities, more come to the surface bought about by world events which we play no part in.

      Would have been far more prudent perhaps to have let it go down, but guarantee all deposits commercial as well as personal. At least no problem with bonuses then either, as they would all be on new employment contracts with a new Bank. Those that were still working that is.

  20. Ian Pennell
    February 8, 2010

    Dear Sir John Redwood

    David Cameron needs to be braver with regards to tackling the deficit because of the risk of the Gilts Markets saying "NO MORE!" to British Sovereign debt. We need to commit to eliminating COMPLETELY the Budget Deficit within the first term of a Conservative Government.

    The TPA book "The Bumper Book of Government Waste" does, as I have said in an earlier posting on your excellent blog, show where £100 billion is going begging. The Conservative Leadership must use that to provide sound funding for our policies (so Labour cant tear into our economic policies), to show we are serious about paying off debt and to provide some tasty red reat- TAX CUTS to millions of small businesses. Tax cuts will also stimulate economic growth, which will actually increase tax revenues. These extra tax revenues can then be used to pay down our debt.

    Sir, you may be aware of an American economist called Professer Laffer. He produced a famous graph called the Laffer Curve. This graph shows that there is an optimum rate of taxation on businesses and wealth creators; tax rises beyond that point lead to falling tax revenues as businessmen avoid paying tax through tax-avoidance schemes or by putting money into offshore accounts. Labour cannot comprehend this issue but we Conservatives really ought to. The 50% tax on high earners will really be 61% once National Insurance is taken into account; we must state that this will actually reduce, not increase, the tax take from the wealthy. And if we have debts to repay we must bring this tax down.

    If taxes must be raised, we must only put them up on spending. So as not to hit the poor, I would suggest a new Luxury Tax levied on the wealthy buyers of luxury items. It would be a special VAT for the rich. To compensate we reduce the top rates of income tax to 30%. Such a tax will not discourage business productivity, but encourage saving. But it wont reduce spending by the rich drastically so more tax would be collected by this VAT on the rich; and in addition the wealthy will be less inclined to avoid paying Income Tax. More tax revenues to pay down Britains huge debts!!

    We don't have the luxury of time to worry about a million Tory-loathing quangocrats that the measures illustrated in the TPA book would imply; there are tens of millions who would vote for us to get 5 pence off Income Tax!! And the big tax reform I have suggested would set Britain on the path to both solvency and prosperity.

    Many grassroots Conservatives are beginning to lose patience with Sir David Cameron over his cowardice over cuts, because all the while this goes on we can't offer a strong Conservative USP (Unique Selling Point) to the electorate.

    The Leadership has two months at most to sharpen up its act. And there MUST NOT be any more dismal performances at PMQs- WE should now be hammering Labour.

    Yours Sincerely

    Ian Pennell

  21. Mark
    February 9, 2010

    I think the market is still feasting on PIGS, watching the UK amble toward the abattoir. "You ain't seen nothin' yet."

    The UK has built itself a debt mountain – £51.5bn of Treasury Bills now add to £886.5bn of gilts in issue according to the DMO, while we owe £1235bn in mortgages (of which £300bn is financed by the BoE via its special liquidity scheme etc. that replaced expired wholesale funds according to the CML – propping up house prices). In addition to that £300bn, there is the £200bn of QE gilts "funding", and other secret loans made by the BoE to the banking sector, whose size is indeterminate and may remain concealed by recent law for a good while yet (perhaps indefinitely). Add to these the debts of business, banks and government financed in other ways and we reach Pink Book levels of liabilities of the order of £7 trillion.

    The ways down off the mountain are tricky: it is like Striding Edge, with the screes of deflation on one side and the avalanche slopes of hyperinflation on the other. Frankly, it is beyond the power of the BoE to control with any delicacy, except to purposely step off the path through halting QE (a one month wonder linked to the prime tax gathering month should not be considered a halt), or priming the pump for high inflation. Its powers of interest rate setting have evaporated so far as new borrowers are concerned. Bank rate merely serves to set the floor rate for savers and the anchor of the interest rate margin that puffs bank profits to replenish losses already made. It is government policy, not the BoE, that will determine if we can find the route back down without too severe an economic fall. Even the gentlest path has a steep descent.

  22. james harries
    February 9, 2010

    A bit unfair to single out the MPC as a bunch of drunks, JR.
    The drunkard's walk has been a metaphor for random movements in the stock market since… whenever.
    Who's to say you'd do better?
    Meanwhile, "it's the deficit, stupid". If you want a risk free return you get more in bunds than in greek bonds, curiously enough. Greek CDS got to 444 on Friday, and are negligible on the bund. Take 4.44% from the greek yield (6.75%) = 2.3%, or take 0.3% from the bund yield of 4.2% = 3.9%.
    My figures may be wrong or out of date, and the CDS spike may be a market inefficiency or wicked hedgies. If not, then greek bonds look ready to fall some more. How much more can Greece take? Or Germany subsidise?

  23. Ex Liverpool rioter
    February 9, 2010

    Not yet John, looking at the US Goverment attacks on Toyota i say the YEN is next……………..then it out turn.

  24. Lindsay McDougall
    February 11, 2010

    On a related topic, some forecasts from the Bank of England's November 2009 and February 2010 Inflation Reports:

    November 2009
    Chart 5.1 Year on year real GDP growth
    Last Q 2009 minus 1%
    Last Q 2010 4%
    Last Q 2011 3.5%
    Chart 5.5 Year on year CPI inflation
    Last Q 2009 3%
    Last Q 2010 1%
    Last Q 2011 1.5%

    February 2010
    As above except that the real GDP growth forecast for Last Q 2010 is reduced from 4% to 3.5%.

    These figures are read off the central line of a fan chart, judged by eye, so it is not possible for me to quote values more accurately than 0.5%.

    A monetarist will tell you that prices are determined by how much money is chasing the total volume of goods and services. So if year on year real GDP growth turns out to be 2.0% rather than the 3.5% forecast, CPI inflation will be about 1.5% more than the figures indicated. If GDP growth turns out to zero, CPI inflation will turn out to be about 3.5% more than indicated.

    Lord Keynes is a neo-Keynsian at heart. At his press conference launching the latest Inflation Report, he kept banging on about there being plenty of spare capacity in the UK economy and that therefore there is plenty of scope for non-inflationay growth. Sorry, Mervyn, that's not the way to bet.

  25. Lindsay McDougall
    February 11, 2010

    Sorry, that should read Lord King.

  26. Report Tax Evasion
    March 8, 2010

    I really enjoyed your post. Thank you for sharing.Thanks for the info. A great find. It's hard to find good articles these days. This one is really good. Great article. Thumbs up for this post. Thanks.

  27. How To Report Tax Fr
    March 25, 2010

    I like it – good article, good information, Enjoyed your post greatly! Great write up! Need more like it! Wish to hear more like this! Your article was very interesting. Thank You.

  28. Early Learning Toys
    May 1, 2010

    We are a group of volunteers and starting a new initiative in our neighborhood. Your blog provided us with valuable information to help us get started|.You have done an impressive job!

Comments are closed.