Dec 02 2008
Sterling is warning the government and the MPC
On Monday the slide in sterling got faster, with the pound having its worst day since the collapse following sterling’s troubled times within the Exchange Rate Mechanism that the British establishment had favoured in the early 1990s. This need come as no surprise.
The Establishment’s latest wheeze of a so called independent Monetary Policy Committee turns out to be as ill judged as the ERM. The ERM led to inflation first, then recession, by forcing the country to take interest rates which were too low, followed by rates that were too high. The so called independent Monetary Policy Committee has done exactly the same thing, without the excuse that they are on autopilot determined by the value of the currency. They have resolutely steered the vehicle by looking in the rear view mirror. They are now about to make their third big error, of setting rates too low for the extent of government borrowing and the fears in the international community about the UK’s financial situation. They left lowering rates too late, pushing us into a bad recession. Now they are taking undue risks, because of the fiscal expansion. Fear of low rates is one of the factors behind the sterling collapse, because investors think the UK is still borrowing too much.
The truth is that both the UK and the US are following policies which will force a cut in living standards. For years both these economies have been living well beyond their means, thanks to easy access to credit from the strong exporting nations and commodity producers who were generating big surpluses. It has been possible for both the great Anglo Saxon democracies to run large balance of payments deficits, large government deficits and large deficits in the personal sector. People and governments have spent too much and borrowed to do so.
Now the world’s markets are saying enough is enough. Living standards in both the public and private sector are being brought down by a combination of government policy and market reaction. The private sector has to sell more abroad and consume less at home. The government sector has to get closer to just spending what it can collect in taxes.
Whilst the recession will force the private sector to contract, there is currently no mechanism to make the public sector take some of the pain. The outgoing President, Mr Bush, is a spendthrift who sees no need to rein in spending at the end of a long period of overspending. The incoming President, Mr Obama, was elected to spend more. The Prime Minister in the UK thinks spending and borrowing more is the right thing to do in the circumstances, and is busily trying to bail out chunks of the private sector which would otherwise have to adjust more quickly to the painful reality that we have been living beyond our means.
On both sides of the Atlantic the authorities have made the decision that most manufacturing will simply have to contract, shedding jobs, closing factories, putting people onto three or four day weeks to slash pay. Meanwhile they have perversely decided to feather bed the bankers, who are arguably more inefficient and much more highly paid than the manufacturers. Both administrations have poured money into banks which should have been told to raise their own capital by reining in their expenditures. The authorities should have given them temporary loans, not permanent capital. I see no reason why taxpayers should pay bankers bonuses in these conditions, when the finance industry needs to get its pay down quickly to sort itself out.Far from being fair or just, so far the pain is being concentrated on parts of the private sector, making the job losses there worse.
Reading the atrocious story of Baby P sums up so much of what has gone wrong in the UK public sector. There was no shortage of highly paid managers, auditors, box tickers and process controllers. The more of these we employ, the less well it seems the task is performed that they are meant to be doing. The UK public sector needs to deliver more for less. It needs its teachers, nurses, doctors and social workers, but it does not need such a colossal army of pen pushers, time servers, mock managers and reviewers, let alone its battalions of spin doctors and management consultants. If the government wishes to speed the end of recession, it needs to start to get the government to live within its means. That requires changes within every service, and a very different approach to inefficient banks paying their senior staff too much.
PS: What a disappointing article in the Mail! As any reader of this site will know I have gone blue in the face trying to get the government and the MPC to take the necessary action to limit the damage and to arrest the downturn. The last thing I want is a cut in living standards and a recession. It is a bit rich for them to criticise me for explaining what is happening and what will happen - which is a fall in many peole’s living standards as the job losses mount in the private sector, coupled with pay awards falling behind this year’s inflation, when I have opposed the very policies of this government which have landed us in this mess. Try again Labour - that one was wide of the mark. It is my caring about the poor outlook for so many British people that leads me to write this blog and to urge policy change to help more people more quickly than the current lethal policy mix will achieve.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
A very fine article Mr Redwood. I feel that most politicans do not pay enough attention to forex. Economic policy must be built on two fundamentals. Price stability and a stable currency. Nothing can be achieved without these two pillars in place. I’m pleased that the opposition is holding the government to account over the health of Sterling. Its an issue that may not immediately register with most voters, but they must be made aware that the Pound in their pockets is losing value with each passing day.
Keep Sterling in the news.
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Well said, but is anyone listening? Certainly no one in this dreadful government and its gang of largely useless MPs.
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mikestallard Reply:
December 2nd, 2008 at 4:25 pm
Or the electorate which has cut Mr Cameron’s lead to just one point (today’s Telegraph).
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[...] Sterling is warning the government and the MPC [...]
I believe there is no option but a cash freeze in overall Government spending for the next 3, possibly 5 years.
This equates to around 3% contraction, or £18-£20 billion pa. A very useful contribution to debt reduction.
Labour will no doubt scream “Tory Cuts!”, but any organisation which has an anuual turnover in excess of £600bn ought to be able to find that sort of saving, year on year, without much effort.
Political policy can also play its part, by shifting resources from the providers of services to their users. Education Vouchers will be a major step in this direction, as would health insurance vouchers, housing benefit vouchers and pension contribution vouchers. We need nothing so crude as pieces of paper, but putting the cash in the bank accounts of the people will make the servants of the people respond to them, not to the target-setters and form-designers above them in Whitehall and Town Hall.
The next Government has the chance to make the sort of radical change in our public services that Thatcher’s Governments of the 1980s made to our industrial sector. A sector which from 1992-1997 added 1 million jobs, but which has been sadly neglected by Labour since they came to power.
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APL Reply:
December 2nd, 2008 at 7:24 pm
John Moss: “The next Government has the chance to make the sort of radical change in our public services that Thatcher’s Governments of the 1980s made to our industrial sector.”
The next government will have to make these changes. They will have no chance to do so, unless the BBC is neutered.
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I’ve read some interesting books from Cato on this very subject and would recommend “Downsizing the federal government” albeit the fact it is obvioulsy American slanted. The author mentions two phenomena which account for the explosion in government spending. First in congressional hearings, they tend to hear from lobby groups wanting money, but not from anyone saying “Don’t spend” Second there is the concept of “Concentration of benefit, diffusion of cost” on almost all spending, And the drip, drip drip effect mounts rapidly.
As a wise man once said, “When you rob Peter to pay Paul, you can always rely on Paul’s vote”
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[...] John Redwood on his blog says that the fall in sterling shows that the UK is living beyond its means and that living standards need to be cut. [...]
“Unite” supporting the Labour Party might have a little to do with the slackness of decision making on behalf of the government but who can say ?
Conversely, a guy from Arizona wrote this in reply to a post on my blog :-
“Public sector workers are being let go left and right here. City of Phoenix is laying off 1200 workers. the city of Mesa is letting go 350 workers, including police and fire fighters. Many other cities are doing the same across the country”.
It appears the US are ahead of us on this issue which will ultimately prove to be essential here but too late as often is the case under Labour.
It may also be of some interest to note what Bush said recently :-
“It is hard for the average citizen to understand how frozen the system became and how over-leveraged the system became,” Bush said. “And so what we’re watching is the de-leveraging of our financial markets, which is obviously affecting the growth of the economy.”
Bush said he felt responsible for the economic downturn because it’s occurring on his watch, but he added: “I think when the history of this period is written, people will realize a lot of the decisions that were made on Wall Street took place over a decade or so” before he became president.
I sympathise with Bush here because the crisis started as far back as the Clinton era on all accounts when he pushed lenders to relax their lending rules for sub-prime borrowers and low paid in order that they could buy homes which otherwise they couldn’t afford.
That policy obviously led to the US Fed engineering a relaxed lending policy which leveraged higher amounts of borrowing and the markets created the financial instruments and the CDS’s which eventually went ‘BANG’ once the risks were realised as being too extreme but inappropriately rated.
I feel the only way to reduce the taxpayers burden and to make more money available for helping our manufacturing base and retail sectors, is to cut expenditure elsewhere or otherwise it will result in heaping more tax burdens on to those who remain working in the private and public sectors which in itself could trigger a backlash from the likes of Unite and other unions unless they are pacified in some way.
I also feel that unless cuts ARE made, that an ever yawning gap will occur between have’s and have not’s, and our society in general will become distinctly unsettled by that as the ordinary guy in the street finds it increasingly difficult to find work.
NOW is the time to make cuts among the higher echelons in the public sector and to trim the cost of these endless government committees as well as taking a baling hook to future plans such as the Heathrow runway fiasco, ID Cards, Air-craft carriers etc, and even to local government and how they spend in relation to EU directives and additionally to the Lisbon Treaty which will give away our rebates if not retrieved.
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“putting people onto three or four day weeks to slash pay” I wonder what the consequences of this are for our Working Tax Credit and Child Tax credit systems?
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Sterling has had a bad fall, but it’s currently at 1.482 dollars (and rising as I write this). It got to 1.466 on November 14th.
I agree that the government’s policies are creating the risk that sterling could have a serious fall. I don’t think it’s happening at the moment, though, because sterling is still above the level it reached two weeks ago.
If excessive government borrowing results in a sterling crisis, I don’t know what we do next; that’s what worries me. At the moment, the public debt figures are bad. If the government’s stimulus package works, we might make the recession longer but shallower. If it fails, suddenly everything will be a whole lot worse. On top of the problems we have at the moment, we could have a sterling crisis, and no room for manoeuvre because the government is unable to borrow.
It is simply irresponsible for the government to take this kind of gamble with the economy. If the worst happens, we could then be faced with a choice between the euro and the IMF. Personally I’d go for the IMF, but even if the government wanted to go for the euro, there is no certainty that the euro-zone countries would accept us. Would they really want to bail us out, when they have so many problems to deal with in their own economies?
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mikestallard Reply:
December 2nd, 2008 at 4:32 pm
It was quietly announced, on a programme on finance last week on Radio 4 that the IMF is now down to its last £100 billion and locked into a stultifying bureaucracy. I don’t know if this is true or not, but it could show why Mr Brown is going round trying to rally up a group of potential lenders.
It also could explain why Peter Mandelson is so anxious (Jose Manuel Barroso’s statement in France) to welcome us to join the Euro. Perhaps this is also why our currency is being allowed to slide?
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Things are a bit grim ain’t they. Anyway, I feel I must enlighten Redwoodians of the following. I prattle on about financial derivatives on this site; I would like to inform you of the public sector (PS) bureaucracy equivalents.
The credit default swap (CDS) - an insurance instrument - has its PS equivalent of the BDS, the Blame Default Swap. It is imperative that any public sector unit must be able to shift blame onto a counter-party - another public sector business unit - should there be a major cock-up or the high risk of one occurring. If you can take out a BDS on a private sector sub-contractor; even better; hospital infections for instance.
Collateralized debt obligations (CDOs) - a structured credit product. CDOs are constructed from a portfolio of fixed-income assets like a book of mortgages or company debt paper. The PS equivalent is the CBO, Collateralized Blame Obligation. If a PS business unit thinks it will be pilloried for cocking up something; and, can find similar business units in the same risk position, then they collateralise all their risks. This is done by spreading the job around several business units and quangos, including the police; health ‘n’ safety and preferably a central government department.
It appears that Haringey Council Child Services was deficient in the blame derivatives market and has suffered considerably. I do know, from some first hand experience as a Councillor, that such departments, in any Council, have the toughest job, by far. It is literally, heads they loose, tails they don’t win.
Finally, Credit Rating Agencies - designed to inform purchasers of CDS; CDO products about quality/risk levels, they failed miserably in the credit crunch. The PS equivalent are the “Inspectors”, in this Haringey case OFSTED. It gave a triple A rating first time round; this time they came up with triple C to D. OFSTED definitely knows how to play the blame derivatives market.
The process of “Mark to Market” means that all Child Services units are now worth a Haringey rating in the media. Mark to Market means that if all the Y reg., Ford Escorts are selling in the market for £300, the one in your garage you paid £600 for; and, in your eyes, it is still worth that money on your household’s books, sorry, it ain’t. Hope you haven’t used it as collateral, like some banks we know.
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Good article Mr Redwood, but surely the opening line should have read, sped up…..
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I don’t agree that a general cut in living standards, except possibly in the very short term, is desireable or necessary. Cuts must be targetted on the non-productive part of the economy. Our government is now spending £200 billion a year more, after counting for inflation, than it was 11 years ago. If that money was still in the productive economy we would have no problem. In theory this would mean ,amy of those on disability, quangocrats & other government employees would lose heavily but in fact they would shortly be able to get good productive jobs.
Government’s role is worse than that. Not only is most of it non-productive but much of it (the regulators, the windmill subsidsers, planeers) are actually counterproductive since they, massively increase the costs of production.
Technological advance is continuing & therefore real productivity & wealth can continue growing at a far faster rate than ever in history. China’s growth rate may shrink temporarily from 11% to 8% & world average growth from 5.2% (CIA world factbook) to about 4% but there is no technological reason why we must be in recession as the world grows.
This would involve a hard fight with all the institutional interests on the other hand there is probably no time when the public will be more ready for change than when our institutional failure is so obvious.
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Mr R you said - “The UK public sector needs to deliver more for less…” I agree as this is what private business does day in day out. Why can’t government and government bureaucrats get this through their thick heads? Eh? Just why?
But the answer is blindingly simple - get government out of any sort of service provision. It just can’t do it efficiently and never will. In theory you could even run the Army on mercenaries, but I do draw the line at that. So onec you are in power will you (a) privatise - as in get government out of everything possible and (b) cut spending?
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Bazman Reply:
December 3rd, 2008 at 10:15 am
How about the banks Lola? Did they deliver more for less? Should we privatise them? What if you do not have the money to afford private everything? Private healthcare means for instance in the case of eye care, if the hospital makes a mess of your sight and you run out of money the state will pick up the tab as it is in the long term cheaper than letting you go blind. How about the railways privatisation fantasy too. Thanks for the dogma. Work in finance do we?
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Lola Reply:
December 3rd, 2008 at 9:32 pm
Sigh. So when the public sector makes a cock up and blinds someone we pay twice? There is no reason why you would run out of money at all and the State (i.e. me and you) could still agree that it was right that healthcare was funded by us, except that provision would be by private business. Plus it is correct that the State (me and you again) should be the insurer of last resort as the State (still me and you) should be the lender of last resort, which brings me back to the banks.
The banks are a cartel supplier of a monopoly product. Once you make the production of money the monopoly of the State this is guaranteed to happen. Especially if you enter the area of moral hazard and guarantee that they won’t be allowed to fail. This inevitably leads to recklessness as was the case in the last 11 years. Mind you they could only lend what they could borrow or make plus what the State made. Brown made (aka counterfeited) Sterling at the rate of 10% per annum compound for 11 years, an increase in the money supply of about 235%. Each pound is now 35% of its value relative to GDP as it was in 1997. (Words left out)
Yes, I work in finance and my clients have been told to pay back debt and not to buy houses for the last 6 or 7 years. These ‘prudent’ people will now be taxed to pay for the stupidities of Brown and, I would guess, people like you.
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Another point to note is that there were a few articles yesterday quoting the Commission President Barroso that though the majority don’t want it, ‘people who matter’ in the UK govt are looking into joining the Euro. I would hope that the opposition would bring it to the attention of the govt that the people who matter in a democracy are the majority - and any such moves should require a referendum. How much more damage can this party do to our economy….it would not surprise me that Crash tries to take us in - just before the whole thing collapses under its own weight….i mean they are already debating easing the conditions of the stability pact….on the other hand if we pursue the current spending spree sterling will continue to weaken - so it becomes more attractive to huddle together. Surely given the depth of the crisis at the heart of the govt and the utter mishandling of the economy - someone should be proposing a no confidence vote…no that that would be good for sterling either - but these people are becoming more dangerous by the day. Isnt there some way to remove them under anti-terror legislation - they are holding future generations and the whole country to ransom. Further I think BoE should not cut rates further until we have a working transmission mechanism…the priority must be to re-establish that.
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Stuart Fairney Reply:
December 2nd, 2008 at 4:06 pm
A moment of inadvertent candour from the normally rather more opaque Senor methinks…
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> There was no shortage of highly paid managers, auditors, box tickers and
> process controllers. The more of these we employ, the less well it seems the
> task is performed that they are meant to be doing.
This is Max Gammon’s Law of Bureaucratic Displacement.
http://www.adf.com.au/archive.php?doc_id=113
Essentially, in a bureaucratic organisation, the more money you put in, the LESS actual work is done. The extra funding expands the bureaucracy, which by its nature causes more and more paperwork and so less and less actual work.
Max was writing about this back in the early 1970s about the NHS.
The NHS was established in 1948 with 480,000 beds and 350,00 staff. By 2000, there were 186,000 beds and 882,000 staff.
THE ONLY SOLUTION IS TO REMOVE THE STATE FROM THE PROVISION OF THESE SERVICES. The problem is if the State is the only provider and the State goes bad (as it has) then what can you do? you’re stuck. You have to have multiple providers - which means the private sector - so when one goes bad you can turn to another.
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Blank Xavier Reply:
December 2nd, 2008 at 7:05 pm
Not unlike political parties, I must say…
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Excellent article.
Its amazing how confusing people seem to think all this is. Journalists do a great job of perpetuating that myth. But there’s nothing confusing about it. Forget the banks, the value of sterling and the sub-prime issues. its simpler. If you spend more than you earn, you end up in trouble. We’ve had a fun decade spending more than we earn.
People don’t like being told they are going to lose out. But if you spend too much, you end up having to reduce spending later or go bust. Short of winning the lottery there’s just no getting around it. As a country, that’s what we’ve done.
So unless the UK can come up with an international equivalent of ‘winning the lottery’ (huge new oil reserves found under Milton Keynes…) then people are going to have to realise that its time to pay the piper. Tighten our belts, cut our costs, and pay off our debts so that we can stabilise our economy. Good, old-fashioned, common-sense of the kind all our parents would have espoused.
Or we can just keep borrowing at ever more frightening rates while our economic base withers and dies from within, I suppose.
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The Labour administration loves to give jobs to people so that they can, themselves, be re elected. This means that it really pays to be loyal to the Labour government and it also means that there are some really desirable jobs at the top of every organisation. All you have to do is to keep your nose out of trouble.
This works in parliament where you can become chair of a commission, a front bencher or even a minister.
It also works in schools where you can become a Head, or, even better, an Ofsted administrator, or on the Board of QCA, or an examiner, or Supply Teacher even. Anything rather than a professional teacher in a classroom. (See the Guardian)
One of the glories of the Secondary Moderns and also of the old Grammar Schools was the Mr Chips character who always appeared out of nowhere when there was a near riot, or someone needed to fix the lighting for the school play, or take a coach on Saturday to an away match. They are now not there, because (Chris Woodhead) they are out of the system.
I was looking at the Telegraph article on the wretched lady who was in charge of the baby P case. Aged 39, she was under pressure from a lot of other people (one of whom appeared to be from Childline!) each of who had different ideas, and each of whom had absolutely no intention of getting involved with the case when it came down to it. The lucky people at the top of the Labour tree at Haringey were, or course, on large salaries and they were right above the grimy business of visiting houses and getting involved.
When Labour says that “public spending cuts mean getting rid of teachers and nurses and other front line services” it shows that they are rubber stamping this deadly process which draws the experts away from the real challenge and, by paying them a lot more than they either need or are worth, it misleads the people on the real front line, and those thinking of joining in, into thinking that their real aim in life is to drive a desk.
There are huge savings to be made here. I just do not think that either the Conservatives are going to be elected if they talk about it too much, or that the Labour leopard is about to change its spots.
Meanwhile, the Ship of State drives on into the fog at full steam ahead.
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Excellent article. We need to hear more of this in the MSM. Interest rates need to rise encouraging people to save; savings increase capital in Banks and Banks can then lend to wealth producing industry. Increased interest rates also deter people from taking un-necessary risks and making poorly judged investments, they would also return the housing market to a more sustainable model.
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So if house prices have fallen about 20% since mid 2007, and stock prices about 40% and they are priced in sterling which has fallen 25% against the USD - how much of UK asset value has been wiped out in the last 18 months?
50%? Can anyone work this out?
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Excellent post.
The problem is - how to communicate this perspective to the public at large?
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What if they backed Sterling with gold, surely it would then have intrinsic value, it’s just lying there doing nothing.
surely Sterling would then be favoured over other esentially worthless fiat currencies.
Do we have enough Gold.
Reply: Gold is a volatile commodity which would add another dangerous dimension to our currency if we sought to link ourselves to it.
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Mr Redwood, your final paragraph contains the simple formula for transforming this country’s current shambolic state of overweening bureaucracy to a rational and cost-effective way of delivery of services to the people who pay for them.
Government must let the teachers teach, the doctors doctor and the social workers work socially (or whatever the proper term is). Government must get off their backs and off the backs of everyone else who is just trying to do difficult work to the best of their ability.
Too much supervision and scrutiny of detail by box-ticking statistic-gatherers make people play safe. Even sturdy professional people whose expert judgment tells them to be bold are dissuaded from doing so for fear that they will be labelled mavericks and held back in their careers.
Not only is it a huge burden on the public purse in itself but it results in the quality of service being eroded. For both those reasons it simply cannot be allowed to continue.
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Your entirely reasonable blog comments seem to, yet again, have been picked up and distorted by either the media, the opposition or both. I hope you won’t give up writing this blog which being a considerable daily effort might seem an appealing option. I cannot see how given the current economic climate there is anything sensational about suggesting there should be a tightening of belts and a cut in living standards. Is anyone seriously suggesting that this fact of life is anything other than non-negotiable?
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Further to previous comment, I found the article from today’s Daily Mail on their website, here is the link in case you haven’t seen it yet:
http://www.dailymail.co.uk/news/article-1091490/Living-standards-brought-DOWN-recession-says-Tory-MP-John-Redwood.html
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John,
You speak the truth. Those who try and spin or disingenuously “accidentally misread” you need to be systematically fisked. If I see it, i will do it.
Grief, even the Spectator is falling for it.
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So Gordon Brown reads your blog.
If only he took notice of it.
If he applied common sense, then maybe our nations finances would not be in such a dire state.
I find it disgusting that Gordon Brown stands in parliament and “creates” false statements regarding other peoples policy and view points, as he did with respect the recent report you wrote.
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Has you ever wondered why in courts, the dock is called the dock or why we have birth (berth) ceritficates.
Or why you are known only as the Registered Keeper of a vehicle.
It seems that we operate under Maritime Law, when we Register (another Nautical term) our Newborn as Berths, sorry Births, we are essentially abandoning our children, Registering you childrens birth is essentially giving Govt permission to Slavage your abandoned children for their future worth ( tax ) to the state.
http://www.tpuc.org
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[...] can hear the echoes of Mellon in the current advice of John Redwood. “Now the world’s markets are saying enough is enough. Living standards in both the public [...]