Author: johnredwood

We live in amazing times. The graph of US money growth is pointing upwards at an unprecedented rate. The graph of the US budget deficit is almost vertical. The last three months has seen the issue of over $ 2 trillion of additional Treasury bills, short term loans for the US government. No wonder the financial markets are booming.

The Fed’s latest figures show annualised  money growth at 40% for the last three months, a record level.(M2, or the amount of money deposited in US financial institutions).  State debt has surged by $2.06 trillion between March and May.

Remembering last time when Central banks starved markets of cash and left the banking system and corporates to plunge into financial reconstruction or bankruptcy for want of liquidity, the Central Banks led by the Fed have this time done the opposite. So far so good – companies have borrowed money instead of going bust,and banks have plenty of cash to lend.

The problems this poses come later. There is first that it must be a bridge to recovery, not to insolvency. Delaying bankruptcies would not be much of a success if we end up entering a credit meltdown when too many companies fail to repay their money on time.

There is also the issue of inflation. So far we just have asset price inflation. If more of this money gets into the bank accounts of companies and people who want to spend it rather than invest it in financial assets, that could prove more generally inflationary. Then Central Banks have difficult choices to make. Putting up rates to throttle back credit is the usual response to cut demand and stop overheating. That in turn means triggering the delayed bankruptcies of the over borrowed companies.

The happy answer is for the Fed and Central Banks to gently throttle back now they have stopped a liquidity crunch. The commercial banks have a lot of work to do deciding realistic and sensible schedules for repayment of loans, and working with business on who has a sustainable business model worthy of support and who does not in these new and difficult times.

The past is another country. We are linked to it by past members of our families, by the buildings and works of art they left us, and by the language, heritage, culture and institutions they helped fashion. We can enjoy the best of their inheritance, and change those parts of it we do not like or approve. The works and deeds of those who came before cannot be undone, just looked at in different ways. We have the precious gift of life, which means we can help shape the world around us, the world we will pass on to our children in due course. The dead can no longer change our world from the grave. Their believers and helpers who are alive can join our democratic process as we battle over their legacies .

I am glad I live in a country which usually respects the past whilst having sometimes passionate debates about it. I remember taking a Russian visitor around the Palace of Westminster shortly after the Berlin Wall was torn down. After I had described a few of the characters portrayed in pictures and statues he grasped a fundamental truth. He said how lucky I was to live in a country that could live at ease with its past. His country had been one where each successive tyrant who grabbed power rewrote the history as he wished and ordered the tearing down of pictures and statues of those who no longer pleased.

Each generation has difficult decisions to make about the built and artistic inheritance. I think it is right to conserve sufficient of the past so all interested can see examples of the buildings for themselves, and can find likenesses of the leading figures that helped shape the UK of their day, for better or worse. I have never thought I should with like minded people be able to win an election and then purge our cities and galleries of memorials to those we oppose. My disliking Marx cannot change the historic importance his thinking has enjoyed, nor wipe out the millions of deaths carried through in the USSR and elsewhere by following his ideology. I fought my battles against Marxist social and economic thinking with my pen as a young man. I never suggested defenestrating his statues.

In the UK we have proceeded by evolution rather than revolution most of the time. The English Church or house evolves, with extensions and new facilities added as the generations pass.So it should be with our approach to the built environment. There are times when adapting what we inherit makes sense. There are times when need and commercial logic points to replacement, building anew. Then should we record and photograph what is lost, so those interested will in future know how we changed the world.

Towns and cities with statues on public ground have democratic processes to decide whether to maintain or replace them. Where a City no longer wishes to remember in open space a former leader who gave money or ran parts of public and commercial life the statue could be moved to a private place that did wish to remember, or to a museum where it can form part of an historical display and account.

I share the hatred of many of slavery and enforced occupation of a country by a military power. I have always resented the way the Romans invaded our country, placed it under a brutal military control, and made a market in slaves to give the senior Romans a wonderful lifestyle. It has not made me want to remove all the Roman statues of the thinkers and leaders of the imperial and colonial government which enforced this system on us. I do not deny that alongside their belief in slavery and military rule they also produced some important academic work and technology. The Romans who delighted in the torture and cruel death of animals for sport were good at building large structures. We can debate what if anything they did for us without throwing their statues into the nearest river or sea.

Living in a democracy means respecting and being tolerant of other’s views. Today none of us are tolerant of slavery, but we can be tolerant of each other’s approach to history. The academics who are often most engaged against the statues of former donors today often depend on donations and fees from China. Are they sure their own deeds are as morally pure as they think those of the past should have been? How do they rate China for civil liberties, freedom of expression and of religion?

A few people are sending in many posts a day including some long ones. I have just deleted a lot From multiple posters without reading to catch up . For this to work Please keep your contributions to a sensible number and length. One poster now sends in so much I automatically delete everything apart from the occasional one or two liner that catches my eye as I go to delete.

On Monday I was at last a winner in the lottery to get to ask a question in the Commons. The occasion was the Urgent Question on the government’s approach to the lock down.

I followed up the work I have been doing and the issues I have been raising with Ministers over the scientific advice concerning the transmission of the virus and how we arrest it. The Secretary of State confirmed my argument that I have been putting for some time that to get a more accurate estimate of the transmission rate the scientists need a run of numbers of how many people in the country have the virus, based on sample tests that seek to capture the population as a whole.

He also confirmed my other point, that it is difficult constructing an accurate trend for the UK for the early weeks of the disease, because this sample testing was not then carried out. There is a danger that the numbers collected then are misleading, or that the presence of many more tests later detects more of the virus than was detected in the period of few tests.

It must also follow that as they move to more localised lock downs they will need even more accurate sampled testing to see what is going on town by town or smaller area. It appears that infection control in hospitals and care homes is also crucial, as these centres may have spread the disease more intensely than social gatherings.

There is a good case to relax the social distancing requirement from 2 metres to 1 metre as soon as possible. The evidence is very little extra protection is offered by the longer distance, though the economic impact of the reduction would be most helpful to hospitality and travel businesses.

Yesterday, I delivered a talk  about the independence of central banks. I am reproducing the slides from my lecture below:

Four assertions to test

• Central Banks are not independent, and never have been. They are the agents of the state or regional grouping they serve
• Euro area government bonds are not sovereign bonds as the governments which issue them cannot create money to repay them
• The Karlsruhe judgement underlines the lack of a transfer union in the Euro area to ensure smooth running of the currency and banking system
• National Central Banks are now working closely with national governments to try to offset the huge economic damage done by the anti virus lock down and social distancing policies

Independent?

• Central Banks are usually established by elected assemblies on the advice of governments. Their functions, objectives and constitutions can be changed any time the political sovereign wishes
• In Europe the doctrine of CB independence was strongly promoted as part of the creation of the Euro. It derived from the German CB set up after the war to create a low inflation stable currency the DM
• The UK also changed from a CB that worked with the Treasury to a narrow idea of independence based around the decisions on interest rates. The Labour government also gave the powers of the CB over the banking system away to a new Regulator

Collaborative?

• The Fed always had a twin objective of low inflation and decent growth or employment, and always accepted it had to be in sympathy with government policy
• The Peoples Bank of China makes a virtue out of working within the economic policy framework set out by the President of China

How independent was the Bundesbank?

• The German Central Bank enjoyed a long run making its own decisions about interest rates and general levels of money and credit. It was able to do so because it was successful in its remit and had no serious political opposition to what it was doing
• It proved to be anything but independent when East and West Germany merged. The Bank’s advice on delayed timing and on the rate of exchange for the merger of the Ostmark and DM was ignored. The political imperative of union took priority
• The final irony of the so called independent Bank was when the German government decided to abolish the successful DM currency that the Central Bank was there to uphold and support
• The Bundesbank accepted most of the important monetary powers it possessed being transferred to the ECB

How independent was the Bank of England, 1997-2019?

• The Bank had to accept the loss of powers, including the power to regulate the commercial banks, and the power to issue government debt, in the legislation passed to create so called independence
• The Bank then had to accept a change of inflation target when it suited the Labour government to flip to the softer target of CPI from RPI
• The MPC agreed to an extraordinary meeting during the banking crash to lower rates as part of an international agreement brokered by the Chancellor
• The Bank accepted joint control with the Treasury over Quantitative easing
• The Bank then agreed to a change of powers from the Coalition government, who wished to give it back some powers over commercial banks

The battles between the Fed and the President 2016-20

• The Fed decided on a policy of raising interest rates which the President opposed in public. He favoured zero or negative rates like the EU with more QE
• In 2019 the Fed had to admit they were wrong and changed course to rate cutting, given the sluggish performance of the economy compared to forecasts and aspirations
• In 2020 the Fed altered their opposition to near zero interest rates and proposed more QE as the virus effects gave them good reason to do so

Sovereign bonds are treated differently in markets, usually commanding lower rates and higher prices than corporate bonds, for two main reasons:

1. The state that issues them can demand tax payments on threat of imprisonment to service and repay its debts
2. The state can require the Central Bank to create extra domestic currency to repay the debts if necessary. German, Italian French and Spanish government bonds no longer enjoy this latter characteristic. The ECB and the EU authorities determine money creation in the Eurozone

The ECB offers mixed messages on Euro government bonds

• Mrs Lagarde famously said the spreads or differential interest rates between say Italian and German state bonds was not a matter for the ECB to manage
• The sharp adverse reaction by markets led to the ECB announcing Euro 750 bn  more QE, and spending some of it on trying to get the prices of Italian state debt up
• In practice the ECB partially manages the spreads, but allows Italian, Greek, Spanish and other weaker country debts to offer higher yields than German
• Intervention has been controlled by the so called capital key

The Karlsruhe judgement goes to the heart of whether the ECB should make it easier and cheaper for Italy and others to borrow, drawing on the strength of other member states finances:

• It says of QE “The more its total volume increases, the greater the risk that the Eurosystem becomes dependent on member states policies as it can no longer simply terminate and undo the programme without jeopardising the stability of the monetary union”
• The Judgement condemns QE saying the ECB “completely disregards the economic policy effects of the programme”

The constitutional battle for control of the ECB

• The German court asserts that the member states are “the masters of the Treaties” that embody the laws and constitution of the Union
• It dismisses the judgement of the ECJ, the EU’s Supreme court, as “a view”
• It asserts that the ECJ’s upholding of ECB monetary policy is “simply untenable”
• The Court however seems to give the final power to the German state which may well wish to confirm ECB power over QE

A new era of collaboration between Central banks and governments

• The advent of anti Covid policies closing down great swathes of the world economy and requiring new business models when lock down is relaxed has led to joint Bank and government action
• In the USA, the UK, Japan and elsewhere  the government encourages the Bank to lend and create money on a huge scale, and the Bank encourages the government to spend and borrow on a huge scale
• Both have done so with the approval of each other
• In the Euro area the Bank has expanded QE substantially, but the lack of a clear single sovereign for the EU has limited the fiscal response at EU level and caused more debates about pooling of risks and EU borrowing levels
• Meanwhile member states have expanded their budget deficits greatly without EU demands to limit them to the 3% of the Treaties

The future

• How will the new era of collaboration work out?
• Can the pretence of independence be re created and should it be?

I am asked why I did not write today about the violence over the week-end. I am not running a newspaper and had nothing original or new to say about it. The Home Secretary made a Statement today condemning it and telling us the perpetrators would be prosecuted.

There are democratic ways of moving statues from prominent places if people no longer wish to remember the individuals concerned. The Labour Mayor of Bristol did not get around to doing that.

One of my many disappointments with our membership of the EU was the EU’s attitude towards animal welfare.

As an opponent of bull fighting, I thought it bad that farmland and farmers involved in rearing bulls for fighting attract payments under the CAP, even though they can claim there is no direct subsidy for bullfighting itself. 

As a lover of wild birds, I thought it unfortunate that the so called Wild Birds conservation Directive was also a hunting of wild birds directive, allowing countries to permit hunting a wide range of species that goes well beyond the permitted species like gamebirds  allowed in the UK.

As someone concerned about standards of farm rearing, I thought the EU unduly slow in responding to UK pressure to improve standards over veal crates and sow tethers. It has still left us with relatively low standards.

Worse still for the animals, the UK banned veal crates in 1990  but the EU failed to do until 16 years later. We banned sow tethers in 1998, with the EU resisting until 2013, 15 years later. These differences led to relative gains in market share serving price conscious customers to the continental industry at the expense of our farmers.

In the very vexed area of chicken breeding, the EU was again reluctant to improve the cage space for battery hens. It took until 2012 to get a ban on  the worst conditions.

I find the argument over chlorine washes misleading. The EU allows chlorine washes for items like bagged salad, which I never get complaints about, yet I get complaints about alleged chlorine washes for US chicken. Our water system relies on chlorine washes for hygiene in the pipe network, and medics advise that small traces of chlorine are  not harmful.

I am strongly in favour of proper labelling and explanations of how food is produced. It will always be the case that those with higher incomes will be able to afford the best welfare standards. There does need to be a minimum standard. The question we should ask is can we raise that standard a bit as we leave the EU, without making affected foods unrealistically expensive? I think we can. Those who think the EU guarantees high standards should look at this dreadful history of opposition to and delay of better standards to grab commercial advantage. All the time we were in the single market we have had years of being forced to take meat and eggs produced in cruel conditions we had banned at home.