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Ignoring the huge elephant in the room

by Giles Wilkes     April 29, 2010 at 6:49 pm

Well, if our own deficit is the Elephant in the Room, what is a nearby E300bn economy heading to bankruptcy? Will future post-election commentators wonder what on earth the Guardian was doing running so many different columns on bigotgate while the next economic crisis burst upon our shores? (to be fair to the Guardian, they also have live blogging on Greece).

I hope it comes up in tonight’s debate. Because the Liberal Democrat position on deficit cutting is, macroeconomically, the most sensible. This letter to the FT today summarises the issues beautifully (from Prof Eatwell):

to what extent will deficit reduction result in the government “chasing its tail” as expenditure cuts result in falling tax revenues as a consequence of lower GDP and employment? Second, what is the true cost of the various measures, ie, the discounted value of the stream of GDP forgone? Third, how does this true cost compare to alternative fiscal strategies (reducing the deficit more slowly or more quickly)?

My spreadsheet attempted to illustrate his first point. Try chasing some tail by downloading it.

How serious is the Greek situation? Mohamed El-Erian of PIMCO points out how it threatens the private-sector:

The already material risks of disorderly bank deposit outflows and capital flights are increasing. The bottom line is simple yet consequential: the Greek debt crisis has morphed into something that is potentially more sinister for Europe and the global economy. What started out as a public finance issue is quickly turning into a banking problem too; and, what started out as a Greek issue has become a full-blown crisis for Europe

Is today’s news of a fall in credit demand from businesses and housebuyers signs that Europe is turning down, decisively? It is just a straw in the wind, but if you thought that a second phase of the financial crisis might be triggered by sovereign default hitting into banking balance sheets, would you be borrowing to invest or buy a house? The Economist’s Ryan Avent is more phegmatic, and seems to rely on “Germans coming to their senses’. Do you readers think this works?

A Greece restructuring is all but inevitable, but the cost associated with making Greek creditors whole is very small relative to the potential losses associated with continued chaos. … Right now the politics of a bigger German bail-out of southern Europe look deadly, but so did the politics of massive bail-outs of Wall Street financial institutions.

I think he ignores too easily how far we had to go down Crisis Lane to achieve those bailouts. Making Greek Creditors Whole? Are you sure? Moral hazard, justice, anyone? That would be toxic – not just for Germans.

But the most interesting analyses, for me, comes from Professor Nick Rowe, whose commentary here brings us back to what the Eurozone is really all about – money:

Only the European Central Bank has enough money to fix the Eurozone problem; because it can print it … (BUT) Who has the authority to say that the ECB may risk its seigniorage revenue on buying Greek or other countries’ sovereign junk, when that revenue belongs to all Eurozone governments? Nobody. The Eurozone is not a real country. There is no central fiscal authority behind the ECB. That decision would have to be reached by a political consensus of all Eurozone countries, and I don’t see that happening.

He then describes what may happen in terms that fans of Professor Scott Sumner will recognise – bank insolvency leading to a crisis of escalating money demand:

Eurozone commercial banks hold Eurozone government bonds as assets. With the drop in those bonds’ values, many commercial banks (inside and outside the Eurozone) will become insolvent. There will be (and already are) runs on those banks, as depositors seek to transfer their deposits to safer banks, if any can be found, or withdraw currency, if they can’t. The first year textbook says this fall in bank deposits will cause a fall in the money supply, and that this fall in the money supply will cause a recession.

But the central bank is prevented, politically, from doing what it needs to: expand the money supply by buying up those government bonds. His final prediction is intruiging – that sovereign states, having a shortage of Euros, will start printing their own currencies to pay their workers. New drachma anyone? (Paul Krugman, imagining similar endgames, is now under the table).

How does this play for the UK? Well, our links of contagion are probably less. As Stephanie points out, we are a safe haven compared to Greece. Check out the What’s In the Vaults Table: it’s French banks who might be in trouble here. For once, our bankers didn’t get stuck in. And our economy beats to different rhythms: check out the bullishness about private sector hiring from the CIPD today.

But every party is relying on ‘rebalancing’ – more exports, basically – and how can that happen if Europe is in a panic? I hope Clegg makes the point powerfully: unlike our Conservative opponents, we don’t believe that cutting back, in all circumstances and at all times, makes the economy stronger. And (this is a long-shot) – we need to be more vigorous with the money-medicine if we do teeter into a Double Dip. Like a wise man once said.

Why’s Ken Clarke scaremongering about the economy?

by Giles Wilkes     April 21, 2010 at 5:27 pm

I am one of those people who go around saying ‘You know what, if that Ken Clarke was Shadow Chancellor my decision to not be a Tory would be much more difficult. That Ken’s alright. Knows how to cut a deficit, does Ken, and did it with a chuckle’. That sort of thing.

And he is not afraid of speaking economic orthodoxies at a time when every commentator seems to be going all nef.

Which makes it all the sadder to see how he has gone a bit doolally about the IMF and a need to support the UK if there is a hung Parliament.

“Sterling will wobble. We have seen even minor flickers in the opinion polls causing problems with interest rates in the recent past. If the British don’t decide to put in a government with a working majority, and the markets think that we can’t tackle our debt and deficit problems, then the IMF will have to do it for us.”

Really? When in the recent past have we had problems with interest rates?

Ironically, Anatole Kaletsky in the Times provides an indirect explanation for why the IMF is not going to be needed now (ironically, because it is in a column pointing out how difficult things would have been had we been in the Euro. Fair cop; that would have been a bad call). Here is Anatole:

Why, then, are financial pressures so much more intense in Greece? Mainly because the British Government borrows in its own currency and can therefore simply print more money in order to repay its debts if required. This, in fact, is exactly what the Bank of England did last year, creating new money to the tune of around £170 billion.

The ability to print money can create inflation if the Bank of England miscalculates; inflation rose to 3.4 per cent in March. But the independence of monetary policy gives the British Government a freedom to set taxes and public spending in response to the decisions of British voters, instead of the demands of international organisations or bond market investors

We borrow in sterling, we are legally allowed to print sterling. If the IMF were called up to ‘help us out’ they would look rather quizzical, search through the locker for some pounds, and then turn around to us and ask for them.

Yes, this was the situation we were in back in 1976 – but back then, with inflation running at 15% or so, money-funding the deficit was adding fuel to a fire – whereas now it is a generally popular stimulative tool (read my piece on QE).

Of course, we expect Osborne to join such hysteria (watch this debate; Darling does well IMHO; Vince’s point about cross party consensus is bang on as well). George has form from November 2008.

But from sensible, pragmatic Ken? Tsk. There must be something funny in those big cigars he likes to smoke.

How much worse would inequality be without Brown?

by Giles Wilkes     March 30, 2010 at 9:30 am

I remember how infuriating I found Cameron’s assertion last autumn about poverty, and how bad for poverty reduction Brown et al have been.

Now they are at it again, in their latest increasingly negative poster campaign. The one that really drives me nuts is the first – “I increased the gap between rich and poor, vote for me”.

Brown did not increase this gap. The gap increased. There is a difference. Brown took steps to try to reduce it, as the non-partisan IFS made clear in a presentation this week, which has this slide: continue reading… »

Cameron’s money problems

by Giles Wilkes     March 24, 2010 at 6:24 pm

My brief reaction to the Budget is: I heard loads of micro-things from Darling, all of them adding up to “support for investment”. MoneySupply at the FT has 50 different items, from the questionable ‘forcing banks to lend’, to the substantial £2bn Green Investment Bank, from a tiny £35m for University Venture Capital to £5bn in cuts. All in all I think this was an attempt to do what Michael Burke called for: invest.

Yes, there was missing detail on spending cuts, and the usual optimism about efficiency gains. But as Ed Conway explains in more detail, it all adds up to quite sensible. The deficit improvements have nearly all been banked. Investment is more about pushing the private sector in that direction, with measures such as doubling the annual investment allowance, and bringing all the various schemes they have under an umbrella called “UK Finance for Growth”.

So, in many ways fussy and micro, but insofar as it risked public money, it tried to do the right things. Like David Smith, I suspect a lot of people in small businesses will like it.

You would not be surprised that I was annoyed by Cameron’s response continue reading… »

Beware the deflation lobby

by Giles Wilkes     March 12, 2010 at 11:00 am

As a liberal it came as quite a shock to read this from John Stuart Mill, railing against the devaluation of money:

There are at this day numerous persons who can read and write, and some who think themselves oracles of wisdom, who see no harm in emancipating a paper currency from the restraint of convertibility … there are writers of pretension … who think it the duty of the legislature periodically to degrade the standard (or to authorize an increase of inconvertible paper exactly equivalent) in proportion as the progress of industry creates an increase of productions and a multiplication of pecuniary transactions.

He goes on to say “a pound (precisely as stated by Sir Robert Peel) should mean a fixed quantity of gold of a given fineness”.

Given the havoc that had been wrought by proliferating paper currency, from the time of Sung China through the Mississippi Bubble and beyond, one might understand Mill’s concern. Inflation disorders commerce, and transfers wealth from the saver to the debtor, something that must have appalled any right-thinking Victorian. More pragmatically, it raises the cost of capital, which ultimately hurts us all.

But an overly fond adherence to the solidity of currency has cost society dear in the past, and threatens to again. In the 1930s, it was the countries that left gold first that recovered first. The really stubborn ones like France had worse Depressions. With the ascendance of Keynes, more people began to understand that what matters in economics is how much is produced and consumed, and not just how much ‘gold of a given fineness’ a unit of currency can get you.

When last year the economy tumbled ever further, and the Bank of England introduced ‘quantitative easing’, some Victorian ghosts arose from the grave, in the form of various hysterics shouting about Zimbabwe, the Weimar republic and the threat of hyperinflation.

They were wrong in two ways continue reading… »

Hung parliament could sort out public finances

by Giles Wilkes     March 10, 2010 at 7:21 pm

Given there is no sign at all that the Conservative’s disastrous 2010 campaign is likely to improve, this question of the economy’s performance with a minority government will continue.

A note from CitiGroup puts the case for the prosecution:

There is no consensus across the parties on fiscal policy, while Lib Dem voters disagree with the Conservatives on fiscal policy and prefer Labour’s policies on most other key political issues. Lib Dem voters would rather go into coalition with Labour than the Conservatives. We suspect that a hung parliament would only be able to implement and sustain major fiscal consolidation if boxed in by a market crisis. Gilts and sterling remain vulnerable.

The author acknowledges Nick Clegg’s recent vow ‘not to take any risk with UK plc’, and suspects that they LibDems will not cooperate unless given the Holy Grail of electoral reform in return. Which the Conservatives will never grant.

Clegg is getting annoyed:

“David Cameron and George Osborne are stoking up fears in the markets, actively trying to destabilise the pound and reduce the government’s ability to borrow. It’s like a protection racket: vote for us or our friends in the City will lay waste to your economy, your savings and your job.”

Too right. Chris Cook in the FT has a more nuanced summary of how things might pan out:

The threat of the LibDems pulling the plug on a government is overstated. The third party would, very quickly, be seen as co-culprits for the administration’s programme. So the LibDems would be stuck with them. If they then caused the fall of the government, they would be blamed for the chaos that follows … So the path of short-term naked self interest – the most powerful force in politics – would almost always be for the LibDems to back the administration.

The Lib Dems have the most to gain and the most to lose from the hung parliament situation. Their incentives are unambigiously in the direction of fiscal responsibility. No-ones goes around thinking “I can’t vote Lib Dem – they are too serious about the deficit”. A period where the LibDems hold the sensible middle of the debate: between diehard romantic deniers on the Labour benches, and blinkered trapped-in-the-1980s CutNowCutHarders on the other side, could gain them real credibility with a public worried about the difficult, um, balancing act that needs to be performed.

Anxiety Britain

by Giles Wilkes     March 5, 2010 at 3:00 pm

Los Angeles, a city of some 4 million inhabitants, is enjoying a blindingly good few years for crime. It looks like LA might have only 230 murders this year. Less than one per day! They may have to outsource their dramatic reality cop shows. Nirvanna, for the Los Angelenos. Which means a murder rate of only 6 per 100,000.

This trend has been widespread in the US since the mid 1990s, so that now one or two cities even seem to have a rate as low as the UK. Yes, after a couple of decades of improvement, the USA might aspire to having a murder rate in one or two of its many cities as low as the UK as a whole.

Incidentally, this question naturally leads to another one: if the UK is so much more murder-free than its Anglo Saxon cousin, why is it apparently so much more violent? continue reading… »

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

by Giles Wilkes     February 24, 2010 at 11:45 am

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.
continue reading… »

Guido Fawkes’ is confused and wrong on inflation

by Giles Wilkes     February 17, 2010 at 8:45 am

Guido is SO confused on the latest inflation figures. Because he seems not to understand how annual inflation figures are created, he presents the first fall in the index as proof that INFLATION is settling in.

Proving my prediction in a post a few weeks back: How the Right will be screaming ‘Inflation’ as we go into deflation.

So what figures have come out? Here is a graph of the CPI index:
continue reading… »

Did a Labour ‘spending splurge’ really take place?

by Giles Wilkes     February 12, 2010 at 11:20 am

Has the government really gone on a spending ‘splurge’ since 2007 and worsened the deficit?
The thinking goes like this:

Before the recession, in 2005/6, government spending was already 41% of GDP. Then, the crisis hit. The Labour government lost all common sense and resurrected Keynesianism. This meant a spending splurge – as their own figures show (tables B13 and B14), spending leapt from 43% to 48 or 49% over the crisis. Cash spending went up from £627bn to £706bn in two years. If that ain’t a splurge, what is? So, the government used the cover of a crisis to relaunch defunct economic policies and takeover the economy, to the detriment of our long term prosperity.

Government spending is a higher ratio of GDP since 2007. It is true. But the methodology is incredibly misleading.

Keep this in mind:
* Businesses and households plan forwards. And they do so in terms of nominal cash. But we don’t base our plans on what proportion of GDP our spending is. If GDP expectations fall massively from £1.5trn to £1.2trn, so that my £1500 holiday has leapt from being 1 billionth of GDP to 1.25 billionths, I do not think I am spending more.
continue reading… »


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