Mervyn King makes central bankers look like politicians

21st September 2012

There was an opportunity to suggest questions for the interview and below is my (sadly unused) one:

"Governor: What happened to the "economic re-balancing" you promised after the £ fell by 20-25% in 2007/08?"

For those who have not followed the detail of that issue the exchange rate of the pound had a substantial value as shown by my question. Mervyn King followed it by producing speech after speech suggesting that the UK economy would respond to this by exporting more ansd importing less which he labelled re-balancing. Except that it has not done so with our trade balance remaining firmly in the red. Indeed more recent suggestions are that compared with some of our peers our export performance has in fact been worse and not better in spite of the devaluation.

Mervyn King's more recent forays into this area have moved the goal posts somewhat as you can see:

"The recovery and re-balancing of our economy will be a long slow process"

So slow in fact that after over four years there is little or no sign of it! Economics textbooks may well need to rewrite the section on the J-Curve after currency depreciation for their UK editions.

One example of a re-balancing from the depreciation the Governor is quick to deflect is the blame for is the imported inflation it created.

The Governor was able to make several unfounded assertions

In one section of the interview the Governor asserted that the policy of Quantitative Easing had led to unemployment being lower than it otherwise would be. To this I responded online:

"Jon Snow: Please press the Governor on his claim that #QE helps to reduce unemployment."

It would have been fascinating to see the Governor waffle as he attempted to back up such an unproven and in my view unfounded assertion. A cute addition might be to wait for him to tell us how good the Bank of England's new favourite toy is (the Funding for Lending Scheme) which was bound to be along soon and then ask that if Quantitative Easing is as successful as claimed why the new policy was ever needed!?

It's not my fault Guv!

The Governor also felt able to manoeuvre around the other failings on his watch. For example the fact that inflation has been persistently over target was the fault of circumstances beyond his control rather than the consequence of his expansionary policies. The appallingly inaccurate inflation forecasting record of the Bank of England -rather significant when you consider it sets policy using these with the clear follow-on implication therefore that policy has been wrong- was dismissed by saying he did not have a crystal ball. The lack of UK economic growth was also blamed on "black clouds" from the so-far faster growing Euro zone.

Also the Governor was allowed to talk of bank reform as if it was happening now. Jon Snow was more on the ball here as he challenged the Governor by pointing out that proposals he had supported had been watered down. But sadly there was no challenge on how we will get to 2018 which is when the Vickers Report plans are scheduled to start. the gap looks a classic case of the Sir Humphrey Appleby inspired strategy of setting a date far enough away that the main issues will be forgotten by then!

Putting this all another way my theme that central bankers are the new politicians was given quite a boost last night by the Governor's performance. As was my campaign that such power should be wielded by elected rather than unelected individuals.

Something of a bombshell on the national debt

This is yet another uncomfortable area for the Governor as he gave implicit and frankly at times explicit support to the Coalition's deficit reduction strategy. Apart from the political aspect to this where for once I do have sympathy with the views of Adam Posen there is the issue that yet again the Governor has supported a policy which has hit trouble!

The Governor did drop a fairly heavy hint about a possible change of strategy on this. Here is his preplanned excuse:

"If it's because the world economy has grown slowly, so we have in turn grown slowly, then that would be acceptable"

As in Mervyn King's world everything that goes wrong is apparently somebody else's fault I do not think that the criteria poses too much of a barrier!

Today's public-sector deficit figures

So far in 2012 these can be summed up by the fact that the government looks as though it has loosened the purse strings:

"For the period April to August 2012, central government accrued current expenditure was £264.2 billion, which was £7.7 billion, or 3.0 per cent, higher than in the same period of the previous year, when central government current expenditure was £256.5 billion."

This has been the driving force behind what has happened to the fiscal or budget deficit which has risen in this fiscal year so far. The headline numbers do not show this as they have been flattered by the claimed £28 billion gain from the transfer of the Royal Mail Pension Fund which in fact will give a loss in an example of clear financial alchemy. But hidden away they are there:

"The figures excluding the Royal Mail pension transfer show that, for the year to date, public sector net borrowing has risen by 21.8 per cent, which compares to a forecasted 0.5 per cent growth for the full year."

And we also had a one-off gain recorded from the closure of the Special Liquidity Scheme of the Bank of England which was (conveniently) counted in April:

"If the effect of these two one-off transactions is removed from the public sector net borrowing then PSNB ex in the period April to August 2012 would be £61.3 billion, which would be £12.9 billion higher than in April to August 2011."

Indeed if we consider that borrowing in August 2012 was exactly the same as in August 2011 at £14.4 billion we see several things. Most obviously there is little sign of deficit reduction there! Also rather than the media obsession along the line of "cuts,cuts,cuts" we have seen an increase in spending accompanied by an increase in taxation
. The flagship of the taxation increase was the rise in Value Added Tax (sales tax) from 17.5% to 20%.

The National Debt

"At the end of August 2012 the public sector net debt excluding the temporary effects of financial interventions (PSND ex) was £1039.5 billion (66.1 per cent of GDP). This compares to a PSND ex of £955.8 billion (62.7 per cent of GDP) at the end of August 2011."

Looked at this way we have a higher national debt than a year ago. If you are wondering about the size of the rise as in it looks too low, well it "gained" from the Royal Mail Pension transfer too!

We can also look at it another way. Regular readers will be aware that I feel that insight can be gained by looking at our numbers including the support we gave and indeed to our banks. Yes the same banks for which reform can apparently wait until 2018!:

"The public sector net debt including the temporary effects of the financial interventions, at the end of August 2012 was £2,140.7 billion (136.0 per cent of GDP)."

This number is falling as some of the borrowing is being repaid and also because the banks are recorded as being in surplus:

"Between August 2011 and August 2012 the public sector net debt reduced by £100.6 billion and fell from 147.1 per cent of GDP to 136.0 per cent"

So a much fuller picture is that we are removing some of the debt from our bank bailouts but that we continue to increase our national debt by more normal routes. Also one or two wheezes are flattering the numbers right now but this will wear off.

Continue reading…


More on Mindful Money:

It's the debt based economy, stupid

BOE's damning verdict on the UK economy

UK CPI continues to exceed average earnings growth

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