The UK has rumbled its way over the past two or three years with essentially the same problem which is one of stagflation. We have seen economic growth disappoint again and again but inflation remains over target. Yet the UK economics and political establishment keeps looking for quick fixes and indeed keeps looking for them in the same area which is monetary policy. They have even indulged in name calling as for a while it was popular amongst some to use the phrase “inflation-nutter” to describe those who had inflation concerns. Of course that phrase and the name calling fell into disrepute as inflation continued on its not very merry way above its target! Those using it dropped it fairly quickly as it drew attention to their own often wildly inaccurate inflation forecasts although only Adam Posen of the Monetary Policy Committee fell on his sword because of it.
The reason why I highlight this is because it has been a clear policy error in the UK to emphasis monetary policy as a response to the credit crunch. The “quick fix” has not worked and indeed it cannot now be quick and it plainly is not working either. Splashing money into the system and devaluing the currency are not working and yet we get more of it. Indeed today we are seeing three examples of it being persisted with and indeed intensified.
UK Monetary Policy
Quantitative Easing is back
Whilst the Bank of England is not currently making new purchases it is recycling some £6.6 billion which has matured. So today for example we have some “heavy-duty” QE is it buys some £1.1 billion of Gilts dated from 2028 to 2060.
The Funding for Lending Scheme will be on “steroids”
The Financial Times has published an article presumably leaked from the Coalition government about the FLS which so far has failed to increase bank lending which fell instead! It has however performed as another bank subsidy as they have received around £14 billion of cheap funding in return for a lending reduction. However now we will get this apparently.
“Can we extend it, can we increase it, can we direct it to SMEs? These are the things on the table.”
The Funding for Lending Scheme is expected to be extended and “put on steroids”
If we look at the first statement we wonder if they plan to give even larger subsidies to banks. Also the SMEs or Small and Medium Enterprises may have concerns over promises of money directed to them as this was what FLS was supposed to do in the first place! I genuinely fear that our political class of got into the habit of announcing things and get so caught up in their own rhetoric and hot air that they assume it has already been done. Indeed the Financial Times has presumably unwittingly confirmed this.
The FLS works by providing banks with cheap funds in return for commitments to lend to businesses and households
The first bit is true but it is easy to make “commitments” you never intend to follow-up on. We also have perhaps a side view into the UK’s productivity problem as it has taken three journalists to write a rather short article. Also steroids have some nasty side-effects and I wonder if this is something of a Freudian slip. Of course we also have the problem that all we are getting here is a repetition of the promises made when FLS began.
What troubles me the most is that we are genuinely “Turning Japanese” here as this is pretty much a carbon copy of their failed efforts. So much for us actually learning from their experience.
A falling pound
The UK establishment seems wedded to this and it is ongoing as the latest weak economic numbers of which more later have seen us fall to US $1.484 this morning. It was only yesterday I pointed out that we have fallen some 8.5% against the Chinese remnimbi in 2013 so far. But in spite of many so-called experts and the Governor of the Bank of England telling us that a “rebalancing” is just around the corner since the 2007/08 fall of around 25% it has yet to appear. Indeed today’s figures show it to be as intractable as ever.
Excluding oil and erratic items, the deficit on trade in goods was £21.8 billion in the three months to January 2013. This was £1.3 billion less than the preceding three months and £0.5 billion lower than the same period a year ago.
Whilst this looks as though at least we are not getting worseand maybe edging forwards there are two slightly ominous messages from the further detail.
Export volumes (excluding oil and erratics) were unchanged in the latest three months; import volumes fell by 2.0% in the same period.
So we are not exporting any more and worries about domestic demand are likely to be caused by the drop in imports which is something we have seen in the Euro area periphery as a harbinger of bad news.
Whilst these numbers cover up to the last twelve momths only they do highlight what has been the underlying picture. There was a small gain from the 2007/08 depreciation but unfortunately only a small one partly due to the fact that we are a nation prone to inflation.
We see here methods which are designed via monetary policy to increase the supply of credit via QE and FLS and demand in the economy via a falling currency making us more competitive. However the credit system as in our banks is part of the “liquidity trap” we are in as until we reform it and make it fit for purpose we will find ourselves fulfilling the analogy of pushing on a string. Back on the 27th of September I gave my ideas for reform and made this forecast.
You may have spotted that I feel that monetary policy right now really only has the power to reduce or increase inflation and that its ability to influence economic growth is low at best.
Whilst it is nice to be proved correct in many ways I would rather I had not been as I do not enjoy the economic suffering being inflicted. However if we return to bank reform I explained my ideas here.
As the Eagles put it we have had three or more years of “Wasted Time” when we could have been making progress. To escape our problems we have to start at the heart of the beast in my view rather than keep feeding it titbits to (hopefully) keep it at bay.
If we now look at trying to improve demand in our economy by encouraging a UK competitive devaluation we hit trouble with the word competitive. The evidence from 2007/08 was that either much of the UK economy does not produce products which are price competitive at the margin or we failed to take advantage for some other reason. Either way there is no logical reason that there will be a change for the falling pound in 2013.
This area of the UK economy has opened 2013 in very poor shape as illustrated by today’s numbers from the Office for National Statistics.
Production on a seasonally adjusted basis fell by 2.9% in January 2013 compared with January 2012
Manufacturing on a seasonally adjusted basis fell by 3.0% in January 2013 compared with January 2012
Ouch! Also this does not really coincide with a FTSE 100 index which touched 6500 yesterday does it? The UK has joined the countries which have an apparent disconnect between their financial and real economies. Although of course it is also true that the FTSE 100 has less and less to do with the UK economy and more and more to do with the mining industry as time goes by.
Ironically in the light of the above UK mining does not seem to be doing very well either as this is far from the first month with weak numbers.
However you spin it (and I expect plenty to try….) we see that where 2009=100 UK industrial production is now at 97.1. Is that what the Governor of the Bank of England meant by rebalancing?
Back when the UK election took place in 2010 I feared for whichever direction we took which kept my political balance. I feared that a new government -which came in the form of the Coalition- would be inexperienced and naive and I feared that a continuation of the existing one would have the problem that it would have to change its modus operandi. In the event if we avoid the austerity/stimulus debate it is clear that cutting capital rather than current spending was a policy error for which we are paying the price with exacerbated economic weakness. However it is also true that problems were awaiting us. From May 12th 2010.
Forecasts for the UK fiscal deficit going forward do not look good. Unfortunately they were based upon unrealistic economic growth figures so in fact they are even worse than they appear.
As it is now crystal clear that this is what happened we see that our establishment has failed to get a grip on either monetary of fiscal policy making them rather like Wilkins Micawber
Something will turn up
It hasn’t and if only we had followed his wife instead.
Experientia does it
Instead we are letting it go on for too long.