19 May

Defending the Bank of England

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

It is looking pretty dicey for the Bank and it’s inflation-fighting reputation.  Read Jeremy Warner (Does the inflation target actually mean anything any more?) and above all the point made clear in Simon Ward’s post yesterday (UK CPI inflation 3 percentage points above BoE year-ago forecast).  Here is a graph from last year’s May Inflation Report:

One quick observation: the prediction was based on 125bn of QE.  We have had 75bn more than that, which must have had some effect on inflation (though as I droned on in Credit Where It’s Due, the mechanisms are rather wobbly and demand-dependent).

Another is: how on earth did they make such a prediction when they knew VAT would be returning? Did they simply miss it out? the April CPIY index stands at 112.8, which is 2.1 points above the April 09 level of 110.7, or almost exactly 2 per cent higher.   This would put the forecast error down to 1 per cent.  But if it WAS CPI without tax which they were forecasting, they didn’t tell us.  I see a straight mistake.

A third observation is that Britain’s inflation is a bit of an exception within Europe.  See the charts from Wolf’s (rather boilerplate) post today:

A final observation (coz I have to go to lunch) is this: if the Bank has made a mistake, I would rather it made this one than the other one.  Reading Chris Giles today about what this means for you and me, it comes down to this: it makes living standards go down, but it may help make the budget deficit lower.   And so far households are not expecting it to last.  In other words, a one off transfer, lightening the biggest problem (government debt) and making all of us fairly evenly contribute to the problem.

This crisis needs measures OF THAT SORT to get the country back in balance: lower government debt, lower living standards.   (We could also do with being more competitive, which this doesn’t help, but weak sterling manages that).  Though I look like a hubristic fool to some (even though I stand by my points about Base Effects), actual deflation to such an indebted country suffering from insufficient demand may have been worse.

Lunchtime!

19 May

Great quote from Kamm

Posted by freethinkingeconomist in Uncategorized.

Of the Times

“Whereas all of the parties ought to have been disappointed with their showings in the general election, the eventual shape of government has – for now, at least – pleasingly marginalised the worst people in all of them.”

18 May

Blaming the speculators, part MXXVI or whatever

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

The latest squeal at the sheer unfairness of ‘of the absolute power that the markets have over government decisions’ can be found at LibCon.  To be honest, I can’t make much of it: some of it literally makes no sense to me on the third reading.   For example, what does this mean:

Furthermore, this missed opportunity has allowed Anglo-Saxon hedge funds to speculate on Greek debt, and could lead eventually to the end of the Euro.

Anyone?

To be charitable, I think the author is calling for creditors (the ‘markets’) to take some of the pain in the Greek situation.  I sort of agree.  It takes two to tango.  Remembering what Megan said – “The fact that some moron is willing to lend you money is not a good reason to borrow it” – means that both moron and borrower deserve to learn some manners.  If creditors are NEVER punished, then the market never exercises discipline ex ante – and ‘ex ante’ is when you want the discipline to be exercised – when you can still make a difference.

But as Krugman and many others have pointed out for many posts, it is no good just funding the liquidity crisis if you can’t do something about the deeper problems – the pachyderm in the chamber being uncompetitiveness:

What makes Greek problems so intractable is the fact that there’s little hope for growth for years to come, because Greek costs and prices are out of line and will need years of painful deflation to get back in line. Spain wouldn’t be in trouble at all if it weren’t for the fact that the bubble years left its costs too high, again requiring years of painful deflation.

Some shocking examples of this are in recent FT’s.   From Munchau a couple of days ago:

A reader wrote from Madrid last week that, in his estimation, the price level in his city was about 30 to 40 per cent higher than in Germany – as a result of which he orders all his durable goods from abroad. It is not surprising therefore that we are starting to see core price deflation as Spain cannot maintain a large price differential with Germany forever

And Michael Skapinker today:

A more recent OECD document outlines how much Greece’s pensions weigh on its economic life. In Germany, a typical retired person receives a public pension equivalent to 40.5 per cent of average earnings. In the UK, the figure is 28.9 per cent. In Greece, it is 93.6 per cent

None of these are solved by either (a) bailing out the creditors or (b) whaling on the creditors.   See this graph from the IMF document about the source of the increases in debt: note to all the Spending Splurge Fanatics, only 10% is because of fiscal stimulus (taken from Ryan Avent at the Economist)

Note, again (yes, I am repeating myself): it is a loss of revenues.  But what that revenue loss means is: you need to cut spending at some point.  It is not happening (just) because the market is telling us.

All in all, people take the markets too seriously as some sort of person, or worse a deity. But as Aditya reminds us:

Rather than being one all-knowing entity, financial markets are a convenient term we apply to the hundreds of thousands of daily deals between buyers and sellers and middlemen. When the FTSE goes up, the price of government bonds normally goes down, and what the Swiss do with their interest rates can cause all sorts of mischief for the pound

The markets do exactly the job they should do – intermediate the givers and the takers of money.  They don’t always do it right, but there is no crisis of illegitimacy – as Stelzer writes:

The so-called bond vigilantes – investors who discipline borrowers by dumping their IOUs – are in control, as well they should be: it’s their money that is at risk.

Yup. Aditya is right – the market is not some knowing mind, like a deity. There is no ‘the market thinks this’ or ‘the market demands that’.  This is why setting it up in some sort of opposition to democracy is neither right nor wrong: it’s meaningless.  It’s like complaining about the right of the volcano to disrupt our traffic, or of the right that people have to prefer Eastenders to Shakespeare.

18 May

David Miliband in South Shields

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

I always enjoy the uncompromising leftist views of John Harris (though he seems most uncompromising with the facts of fiscal arithmetic.

He’s not bad doing telly either. Here in this video he follows a disappointed Labour voter, and a pre-election David Miliband, round South Shields.  The DLV followed this up with a Cif Piece explaining why he can’t be a Labour voter any more.

Miliband’s stance is a sign that “next Labour” must be willing to change. Is it? Or is it more likely that the uneasy alliance between the Conservatives and the Liberal Democrats has presented just another rebranding opportunity for a party still driven by spin? Timing is crucial, but so is integrity, more so in the post-expenses scandal era, something Miliband survived relatively unscathed. He has the support of the majority of his constituency. But will he be able to convince the rest of his party and the public at large that he can turn Labour around?

What isn’t clear to me is what ‘turns Labour around’ means.  There is a lot of stuff about reconnecting (which Chris does a wonderful job on).  But two big themes of the video seem to clash, in my view.  They are:

  • the DLV and his wife both depend on the public sector.  He ‘is a lecturer in media &cultural studies’.  She, a management consultant on a public contract in the pension industry.   Both are worried that (because Spending Minus Revenues >#150bn) public spending might be cut
  • South Shields doesn’t make anything any more.  Asda is their pride and joy.

Forgive me, and I don’t want to sound snide, but if I were a rightwinger sceptical of government spending, I would be ranting on my blog about how Labour has let the country go to rack and ruin, because instead of supporting manufacturing in some unspecified way, they’ve been lining the pockets of their ‘clients’ who do jobs like media studies and management consultancy. Something doesn’t add up; is Rob suggesting that South Shields can entirely and sustainably regenerate itself on his sort of job? Where does JH think the revenues will ultimately come from?

My other impression from the video is how DM comes across: wonkish, yes, but human, at ease with people, quite natural.  The attempt to spin this video as “Miliband doesn’t even recognise his constituency” – the reason I went to watch it – doesn’t wash for me, and seems a little underhand.

My final observation is: if there are a bunch of Labour voters who have been turned off Labour because they have accepted the need for fiscal cuts in the face of a permanently lower state income to fund spending, where will they turn?  I don’t think there is a ‘Deny the Reality of Fiscal Mathematics’ party out there – which suggests to me that they may just return to Labour.   A bit dispiriting.

18 May

I won’t deny it: the inflation figures suck

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

Here is the BBC story; here is where you can get the data.

The BBC mentions volcanic ash driving up Food prices. But as far as I can see, the things that rose hardest from March to April were not particularly vulnerable to delayed flights:

(correct me if I am wrong: I did that graph in  2 minutes and who knows what might have slipped)

My concern – and everybody’s – should be the problem Chris alluded to that may be happening in the US (via his blog) – a permanent worsening in the unemployment-inflation trade off.  If we get higher inflation for each level of capacity utilisation, the economy is in for a very poor time.  I continue to hold onto hopes that are still mentioned in the Bank’s Inflation Report – that there is still considerably slack according to surveys, that currency weakness will pass through (commodities are off their highs, driven by world economy weakness), and that working capital will be freed up, which helps drive prices lower.

If these figures DO indicate higher inflation in the future, the consequences ought to be higher Bank rates, a higher currency, and so on. Sep 11 LIBOR futures fell 7 bps on the news, indicating the former at least. If it is any comfort, they are still considerably higher (i.e. rate expectations considerably lower) than at the beginning of May – by 50bps.  However, let the comfort end there, because what probably happened since then is a general expectation that euro growth will be much lower.  That is not, in anyone’s book, good news.

(PS While I am depressing you all, see this graph of a warming world from Econbrowser.

18 May

Robin Hood, the prequel: a defence of feudalism?

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

Look, I know I ought to hate this movie.  But though I found it long, I enjoyed pretty much every one of its 140 minutes.  Yes, it plays havoc with history.  Even though Robin Hood is just a figure from ‘folklore’, and therefore a big blank as far as real history is concerned, we all have a a sufficiently strong sense of the ‘real’ Robin Hood that it can be offended. But Robin Hood is meant to represent someone striking back against murderous arbitrary power sucking all the surplus from the common working man.  Insofar as the movie is meant to set up his subsequent life of righteous banditry, it does it pretty well*

Instead, history took its heaviest blows at the level of kings’n'queens international politics.  A French-versus-British angle was daft just 130 years after the Conquest – the two Kingdoms overlapped, surely, and the Channel was not the great barrier against being overrun by the French that it was to become.  And why was King John (superbly cast, incidentally) shown burning up a copy of the Magna Carta before the barons?

Nevertheless, I enjoyed a sense of historical realism behind the nitty-gritty of the film – the sense of struggle and risk in medieval life, and how this must have interplayed with the rules of society at the time.  To put it in dull, economistic terms: the surplus produced by the farming economies of the time must have been so precarious, so subject to nature’s whim, so vulnerable to uncertain property rights, that I could understand how inhumane feudal rules and power structures were necessary. Anything that guaranteed order of some sort, including the Mafia rules of feudalism, must be better than anarchy.

The other point I was fumbling towards is this.  We use Robin Hood as a metaphor for anything that takes from the Rich and gives to the Poor.  So when Brown put up taxes on higher incomes he was being Robin Hood.  However, this is using the state to take from the rich to give to the poor. As League of Ordinary Gentlemen points out, in medieval times to be rich WAS to be the state.  Hence the temptation for numerous right-wing thinkers to adopt the Robin Hood character instead.  They link to a NYT piece by AO Scott:

You may have heard that Robin Hood stole from the rich and gave to the poor, but that was just liberal media propaganda. This Robin is no socialist bandit practicing freelance wealth redistribution, but rather a manly libertarian rebel striking out against high taxes and a big government scheme to trample the ancient liberties of property owners and provincial nobles. Don’t tread on him!

LoOG are right that the strongest message you can get from the movie is about abuses of power, and its importance in economic relations.  For me (predictably) it weakens the right of the Robin Hood Taxation people to use that image in their campaign.  As Tim Worstall and I have argued tirelessly, such tiny transaction taxes end up landing on you and me.  In Robin Hood’s time the transaction tax would be the equivalent of a duty on grain, beer and mead, which King John claims as being aimed at big Abbey brewers**, and really ends up on the ordinary peasant.  He’d be aiming an arrow at it.

*Though I doubt there will be a sequel: having seen so many castles stormed and Frenchmen thrown lustily into the sea, let alone the origins of habeas corpus, the derringdo against the Sherrif of Nottingham will seem rather quaint

**on this subject, look at the madness of recent micro-economic tinkering on breweries via a letter to the FT

The taxpayer now provides a small brewer producing around 5,000 hectolitres of beer with an annual duty subsidy of about £170,000 (and even more for those brewing stronger beers). The relief is so highly tailored to the small brewer that those brewing slightly more are likely to be in the position that even if they could brew their beer for nothing, their duty bill would still make them more expensive than a microbrewer.

17 May

Wresting back monetary control, surrendering fiscal

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

The big headline from Osborne’s first days at the Treasury is his setting up the Office for Budget Responsibility.  Stephanie Flanders describes the move here (she adds an observation about Osborne asking Mervyn King for permission to start cutting) and argues that this is not as significant as Brown giving away power over interest rates to the independent BOE in 1997.  Nevertheless, Ms Flanders sees this (current three man) operation as potentially a ‘hugely powerful force’.  John Rentoul is in no doubt:

the real issue is that the OBR will define government borrowing (clarifying the Private Finance Initiative and other off-balance sheet devices) and pronounce on what should happen to it in the coming years. Osborne and Laws would not be able, in practice, to ignore its rulings, provided that they are not patently unreasonable.

At a time when fiscal decisions will be as massively full of consequence as they have ever been, the word of an appointed three man committee may be too powerful for the new Chancellor to ignore.

The backdrop to this shift in power is the implicit assertion that Labour cooked the books.  David Smith does not agree, and LeftFootForward – run by Will Straw whom we should remember is not only son of a 13-year minister but also ex-Treasury himself – is rather outraged at the slight to the Treasury’s integrity. The FT writers at the Westminster blog meanwhile point out that ‘independent’ forecasters have their problems too, with a graph showing how evenly distributed have been the errors over the long period.

And as Dillow observes the latest revision revealed that Darling had been too PESSIMISTIC by £20bn or so.  All in all, my concerns about an OBR as expressed over a year ago in Fiscal Rules OK? are yet to be assuaged.

In the meantime, the opposite movement of power is taking place in the monetary sphere.  Politicians are recognising that in these difficult times the monetary steps we need become quasi fiscal.  Read Clive Crook today:

Monetary policy was thought separable partly because it seemed simpler: all you have to do is control interest rates. But in a crisis monetary policy gets complicated. Quantitative easing erases the line between monetary and fiscal policy altogether. When central banks support troubled borrowers, public or private, they expose themselves to default risk: again, fiscal policy by another name. Such interventions involve choices about who will be protected and who will pay. Those are, or should be, political choices.

Words that were largely prefigured in Credit Where It’s Due, where I used idea ‘restoring fiscal dominance’.

What an odd world for macro-policymakers.  With Merkel calling for balanced budget rules, and Osborne ceding some powers of suasian (i.e. embarrassment) to the OBR, we have technocrats or inhuman rules taking over fiscal policy, which in its turn is about to be ineluctably infected with the consequences of monetary policy.  Who is in control any more – if things go wrong, who do we blame?  What political structures do we need to manage accountability and to coordinate all these areas?  That is the biggie.

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