How to beat off an organised attack on sterling if Labour was to win

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I was on Talk Radio yesterday talking about the threat of a run on the pound if Labour was elected. You can hear it here.

The key question Julia Hartley-Brewer (no friend of Labour) put to me was what could actually be done by John McDonnell to manage this situation? My response was simple. One of the major mechanisms I suggested that might be used to engineer an attack on sterling would be a large scale sale of government bonds (gilts). This would indicate a withdrawal from sterling, a lack of confidence in the government, a signal that the market would not lend what Labour wanted, and would (because interest rates are the inverse of price in the case of gilts) force interest rates up (which is the surest indicator of there being a run on the pound) by forcing prices down.

But, I said, any Labour government could now manage this. What it could say, even before it was elected, was that it would actively intervene in the bond markets by requiring that the Bank of England intervene to buy any amount of gilts that the market wished to dispose of in the event of its election using newly created money that would be put into use by the Bank of England for this specific purpose. As a result any seller would find a willing buyer, and the price would not go down after all. None of the signals the attack would be meant to deliver would arise in the market as a result. In that way any market storm could be ridden out, interest rates could be kept stable, the debt market would be kept in good order, there would be no pressure on base rates and within days the hysteria would have dissipated and the identity of the party really in control of the markets (the Labour government) would have been firmly etablished.

Julia Hartley-Brewer suggested that this would be hypocritical as Labour had criticised QE for its harmful social effects. I made clear that this was not QE intended for permanent use: it would simply be undertaken to deliver market stability, which is a government responsibility, and in this case I would expect reversal of the QE policy as market balance was restored.

I am not saying this is the only answer. I am saying that Labour can beat the type of nonsense that the Right are so keen to propagate on issues such as this with just a little aforethought. And as I said, and as Hartley-Brewer acknowledged (to her own surprise) John McDonnell is right to be working on this as a result.