Why Tories are deluding themselves over Brown’s gold sell-off


11:45 am - February 24th 2010

by Giles Wilkes    


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If the Tories had won the 2001 election, would Britain’s fiscal position been in any better shape? Spending would have been less, but we might have had huge tax cuts instead, a bigger housing boom… Or, instead, if they had cut the deficit, would rates have been lower, the housing boom even more out of control?

Only the truly idiotic would think that Brown bringing in the FSA somehow led to the financial crisis. But you still read it from time to time.

However, one piece of counterfactual history is SO easy that the Right can seldom resist bringing it out against Brown, and that is the Decision to Sell the Gold. Leading from this Times’ article , Tim Montgomerie at ConHome can barely contain his gloating on the subject (hat tip LeftOutside).

But I think LO’s attempt at a defence – continued on here on LibCon – does not go far enough.

Sure, the money was invested so the loss was smaller. More important is to bear in mind the record of abject failure that Brown had inherited, and was trying to rectify when he ordered that decision.

First, gold earns nothing. In fact, storing it costs money, though I will leave that fact out for my calculations.

Two, since 1979 the price went downhill or sideways therefore losing money compared to any other assets during a great boom for all things from 1982 – 1998.

Three, gold is normally regarded as an inflation hedge. It ‘keeps its value’ (caveat: see graph above!). So when things look inflationary, or the value of nominal financial assets looks under pressure (see 2007-9) it rises in value.

Four: the point of central bank reserves is to have something you can sell that has external value. It can’t be your domestic currency because you have as much of that as you need. Liquid currency from trusted foreigners will do as well. Like $s.

Five, in 1979, for the first time since the 1920s, there arrived a British government with an absolute intention to kill inflation if necessary by crunching unemployment, high rates and all that. Really determined. Therefore Geoffrey Howe could have known with great certainty that from Britain’s point of view gold was going to become less valuable. He might have also thought: if I want to demonstrate my commitment to low inflation (because high inflation has so many temptations), then getting rid of any inflation hedges whatsoever would be a good idea. It would show people I put my money where my mouth is. In fact, a bit like what Brown did.

So. Why didn’t Howe sell? And how much did it cost us that he didn’t?

I have done the calculations. Really simplifying: the scenarios are (1) 650 tonnes of gold held from 1979 to 2008; (2) What happened: 650 tonnes held, then 400 of those tonnes sold and presumed to be invested in $s at T-bill rates; (3) If Howe had taken the action Brown did and sold 400 tonnes in 1979.

Here is the result I get:

To put the figures into context: at about $12bn, in 1979 the 650 tonnes of gold were worth about 3% of Britain’s GDP. By 1998, they were worth $6bn or so, which would have been worth about 0.4% of GDP at the time ($1.6trn). Had Howe sold 400 tonnes, they would have been worth $28bn, or about 1.75% of GDP. That is a lot to foresake, because of fetish with gold.

Brown’s current mistake has cost perhaps $7bn by my calculations, to the end of 2008. As someone who used to work in spreadbetting, I find hindsight trading hugely irritating, so taking it far beyond the years he sold it annoys me immensely. Still, let’s round it up to $10bn to take the recent uprush into account. By my estimations, that is about 0.4% of GDP. There are far bigger mistakes to make.

I think holding onto 600 tonnes of expensive inflation-hedge while actively trying to kill inflation was a costly mistake of the Conservatives.

Brown’s error on the other hand looked good for 2-3 years, has cost far less, and at least had the virtue of reason on its side. It is, after all, a barbarous relic – and a fixation with gold has cost mankind greatly at crucial times in the past.

——————
cross-posted from Freethinking Economist

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About the author
Giles is an occasional contributor. He blogs at Freethinking Economist
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Reader comments


‘Only the truly idiotic would think that Brown bringing in the FSA somehow led to the financial crisis.’

Only the truly idiotic would think that this wasn’t a benefiting factor!

A couple of caveats:

Some might want to distinguish sins of omission from sins of commission. Fair enough, but many of the complaints against Brown’s fiscal mismanagement are about sins of omission too: he failed to stop this, he failed to realise that. I have some sympathy – well, a lot – with those complaints – but think that one can validly raise the sin of omitting to sell a sterile metal for 30 years before as a result.

Another thing that has come up on my blog and Redwood’s: gold has this wonderful fixed quality that gives us extra reasons for holding it. Sure – but then you can’t have it both ways, and also treat it as a volatile, mark-to-market speculation.

My biggest complaint is the relative triviality of this criticism of Brown. Would we be better off if he had not done this? Well, sure. But with GDP about 10% lower than expected this year, than we thought just 2 years ago, this is a pretty minor complaint. £150bn per year, versus a £7bn one off….

“Why didn’t Howe sell? And how much did it cost us that he didn’t?”

Substitute the name of any Chancellor previous to Howe and you get even larger figures…..well, maybe actually, given the price jump in the 70s.

But I reckon you can only construct a decent (nonhindsight) reason for selling gold around then. Before 1973 Bretton Woods stops you doing much; I suspect Healey would have had no opportunity.

It is perhaps fairer to say that Howe would have had to wait at first, and that a more realistic scenario was selling some over 1980-84. But you still get a pretty big difference.

G

Graphs with commentary on are the way forward. Keep ‘em coming!

Again the only image that comes to mind when Tories whinge about gold is all the thousands of seething Tory Scrooge McDucks crouching over their little hoard of shiny stuff so no else can get at it.

To even think of nominal value changes in central bank reserves in a floating currency regime as representing a taxpayer loss is nonsense. If the commercial real estate market falls 10% do we consider that all public buildings have fallen in value by 10% and this represents a loss to the taxpayer? What about when it rises 10% do we consider the government have made the taxpayer a 10% profit?

I’m not sure that it was the decision to sell in the first place that gives rise to the criticism of Brown – rather the completely cack-handed, ill thought out, grossly incompetent (and therefore typical of everything Brown does) act of annnouncing it to the whole world prior to doing so. Announcement gives way to slump in price and enters text books as “Brown Bottom”.

Some very good points. Thank you.

I apologise for posting a link, but these were my thoughts 6 months ago.

http://alienfromzog.blogspot.com/2009/05/never-talk-about-politics-or-religion_08.html

AFZ

Why did Brown repeat Howe’s mistake?

You can’t compare different timescales and then compare absolute figures. Also, didn’t Brown himself finally admit his gold sell-off was an error.

It’s quite right that he’s made far bigger and costlier mistakes, but he is a Socialist so what can we expect?

12. J Alfred Prufrock

@11

Because Conservatives never make mistakes do they?

Giles;

Could you run your analysis again after inflation adjusting for your Tbill/Gilt returns? You’ll get a very different answer.

It also has to be said that the money Brown recieved from Gold sales was not invested – it was spent, so you cannot compound any returns from those sales.

Lastly, you miss something hugely important regarding reserves; they are another means of security for foreign investors both in terms of Gilt markets but also for foreign trade. It is a means of showing we can pay our bills without inflating them away or devaluing the currency. Not the other way around, as you suggest.

Tyler

I’ll keep this in my inbox to remind me to do that. But:

the UK cannot inflate away the value of dollars

is one obvious point. Where do you get it that the gold was sold and transferred to the UK government for fiscal purposes? Asking honestly.

Do you think Gilt returns are lower than US bond returns?

“the UK cannot inflate away the value of dollars”

Exactly….gives investors and trading partners confidence. We can debase our own currency but not USD/gold price.

The government doesn’t invest money – certainly not at the time of the gold sales (it’s become a froced investor in RBS etc now). Any income from gold sales would have hit the UK’s bottom line and have been used for current spending. If the government did invest, we might not have a massive problem with ~£1tr of unfunded public sector pensions (which Brown carefully avoids adding to the national debt, despite it being a liability).

Not sure off the top of my head if Gilt returns are lower the US bond returns, but there will be not much in it for a local investor in each once you inflation adjust. For a UK investor though, USTs have provided a much better return, thanks to GBP selling off so much (another great job from Gordon – it’s had a much bigger move than when the UK was forced out of the ERM).

Investing in T-Bills would have trebled the value in 28 years? Not while Greenspan was running the Fed.
The gold price is still a little lower in inflation-adjusted terms than in 1980 (the post-1919 peak) but is far higher in £ or $ terms – in £ terms it is nearly three times the level in 1980 and more than three times the level in 1979
So where the hell did you get that graph from?


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  2. MusicMP

    RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  3. Paul Sandars

    RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  4. Liberal Conspiracy

    Cracking takedown RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  5. Quietzapple

    RT @pickledpolitics: Cracking takedown! RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  6. Ben Cooper

    RT @libcon: Cracking takedown RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  7. Andreas Paterson

    RT @libcon Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  8. Harold Dalton

    RT @libcon Why Tories are deluding themselves over Brown’s gold sell-off http://bit.ly/99HJzX

  9. sunny hundal

    Cracking takedown! RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  10. Luke McGee

    RT @pickledpolitics: Cracking takedown! RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  11. Chris Paul

    RT @pickledpolitics: Cracking takedown! RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  12. Lee Griffin

    RT @libcon: Why Tories are deluding themselves over Brown's gold sell-off http://bit.ly/aY4PSZ

  13. Adam White

    heres that LibCon article from a bit ago, debinking the gold myth http://bit.ly/bOSW8o #bbcqt

  14. Leon Green

    RT @theday2day heres that LibCon article from a bit ago, debinking the gold myth http://bit.ly/bOSW8o #bbcqt

  15. sunny hundal

    @mrharrycole @OliviaCole1 and lastly, here's an economic response to your silly point about him selling all the gold http://bit.ly/aY4PSZ

  16. Chris Paul

    @mrharrycole @OliviaCole1 and lastly, here's an economic response to your silly point about him selling all the gold http://bit.ly/aY4PSZ

  17. sunny hundal

    @timmontgomerie @ToryPressHQ yes, because Gordon Brown is really to blame for not predicting gold prices http://bit.ly/aY4PSZ

  18. Paul Burgin

    @timmontgomerie @ToryPressHQ yes, because Gordon Brown is really to blame for not predicting gold prices http://bit.ly/aY4PSZ

  19. Ben Lamb

    @IntravenusMP Well what of this expensive 'mistake' (that is, a mistake in hindsight only)? http://t.co/A8KTs3U the 2nd chart, I mean.

  20. Luke Charters-Reid

    @raymondfinch @jazzifull oh yeah it's here http://t.co/cjUHMwq

  21. Left Outside

    @alanbeattie You think Osborne lost a lot on Gold? Howe lost a lot more by not selling in the 80s http://t.co/yaJjG4mo

  22. michael brannigan

    @polleetickle @torrs_hydro Here's a link that I've discovered that dispels the myths. http://t.co/SWrVq87V As for the USA will get back 2 u

  23. sunny hundal

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  24. pmphillips

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  25. Kathleen Langley

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  26. Martin Grouch

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  27. Chris Paul

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  28. George Luke

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  29. Cllr Krupesh Hirani

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  30. Billy Bowden

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  31. Ben Singleton

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  32. Dominic Moffitt

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  33. Mark Silver

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  34. JC

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  35. Pranav Patel

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  36. Shawndra

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  37. Pranav Patel

    @sunny_hundal @gazdonone worth a read but the article seems highlights the value of hindsight http://t.co/ntwLF3Zb

  38. jontylangley

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  39. Xanno M

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  40. Fenner Pearson

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  41. PhilipHammond

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  42. Citizen Ember

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  43. Dean Reeves

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  44. Benjohn Barnes

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  45. Luke

    rather fun graphs at Geoffry Howes expense! @sunny_hundal: http://t.co/jAjzyWP6”

  46. Hussain Cheema

    I feel embarrassed for right-wingers when they claim Gordon Brown "filched our gold". It's our version of 'Birtherism' http://t.co/z70V3LGW

  47. Sunny Hundal

    @redkarateka @TrippyPip err no – read the article properly. And see this follow up http://t.co/e3GqqFKB





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