The Mail has this front cover this morning:
The implication is that boom times are coming and that growth is going to happen. That is Kwarteng's approach to economic management. He wants to provide a stimulus by injecting more money into the consumer economy.
In contrast, the Bank of England is increasing interest rates. It did so yesterday. It will not be long before it does so again. The implication is that it thinks the economy is overheated and money must be extracted from it.
Only one of these approaches can be right. At present we have the Bank and Westminster at war with each other. That can only end in tears. As it is, they're both heading us for meltdown and the fact they're fighting each other whilst pursuing their separate paths to achieve that goal will only make things very much worse.
What did we do to deserve this?
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Kwarteng is half right, we do need a fiscal easing to counter effect of energy price rises… but he is delivering that easing in completely the wrong way. Tax cuts to the already well off/comfortable while the NHS is lectured about ABC by Therese Coffey? It’s grotesque.
The BoE is profoundly wrong if it thinks it must fight the government. For all its ills our government IS the government and the BoE is not. Central Banks should support their democratically elected masters, not oppose them. At a more superficial level it is wrong, too; higher rates doesn’t make energy cheaper it just crushes people/businesses.
What a mess we are in.
Agreed
Well, indeed. “The question is, which is to be master — that is all.” And it is not difficult to tell who is the boss, as between the head of HM Treasury and the head of its wholly owned subsidiary. (“We are wholly-owned by the UK government. The capital of the Bank is held by the Treasury Solicitor on behalf of HM Treasury.”) https://www.bankofengland.co.uk/knowledgebank/who-owns-the-bank-of-england
Kwarteng knows he is in charge: he sacked the Permanent Secretary on his first day, and the post of Second Permanent Secretary has not been replaced since the incumbent retired last year.
It seems that Kwarteng gives “full support for the Bank’s mission to get inflation under control” and affirms “the Bank of England’s independence and its monetary policy remit”. They both agree that “getting inflation under control quickly is central to tackling cost of living challenges”.
But Kwarteng also believes that “reforms which create the conditions for a high-growth economy can help to alleviate inflationary pressures”, and he wants “fiscal loosening in the short-term [but] over the medium-term, the government is committed to seeing debt falling”
https://www.gov.uk/government/news/readout-of-the-chancellors-meeting-with-the-governor-of-the-bank-of-england
Well, good luck with all of that.
Incoherence rules
The Tories have always lived a lie re debt and it seems got away with it.
https://www.taxresearch.org.uk/Blog/2019/11/13/the-tories-have-borrowed-67-5-of-uk-national-debt-since-1946/
https://www.taxresearch.org.uk/Blog/2021/06/24/the-tories-have-always-borrowed-more-than-labour-and-always-repaid-less-they-are-the-party-of-big-deficit-spending/
True
Nobody is Fighting the BofE. It is the job of the Bank to advise KK on the best course out of the home made disaster. Do you want the Bank simply to do whatever KK wants without questioning the policies. That’s Pootinesque
Danny Blanchflower and I are criticising the Bank
The PM and the Chancellor are pinning all of their political and economic hopes on growth. It will be interesting to see if they can create enough of a stimulus to get us out of the recession we have been in for most of this year. Isn’t this stagflation?
I suppose, if you analyse the economy as responding to supply shocks, particularly in energy, like we suffered in the 1970s, then Truss and Kwarteng see themselves as Thatcher in 1979, prescribing the unpalatable medicine they think we need. Perhaps they have forgotten how badly Thatcher’s first term went. But to follow the historical precedent, are they planning for a quick war to distract from our economic woes and give a patriotic bounce to win the next general election? The reduced British armed forces today would struggle to retake the Malvinas if Argentina invaded.
Two bald men, one buying a comb with fine teeth, the other a comb with coarse teeth.
I have been waiting for this shoe to drop. We have an “independent” BofE (really?!) because the control of inflation should not be “political”, but provides monetary decisions independent of Government that is established by impartial bankers (it is almost comic when you write the assumptions down). Professional bankers are supposedly the impartial experts.
Similarly you have the OBR as the public reminders to Government of the consequences of Government economic decisions, because this impartial advice requires to be carried out by professional economists.
Meanwhile:
The BofE did not see the 2007-8 financial crash coming, and the commercial bankers almost crashed the financial system beyond recovery. The BofE’s authority is some way beyond its actual level of competence. The BofE is now increasing interest rates in order to combat the prospect of the Government’s new tax reduction policy increasing domestic inflation, by sharply increasing rates at the same time the underlying inflation in the UK is caused by external non-domestic (energy driven) inflation, over which the BofE has no control whatsoever, and no capacity to manage. The population is therefore essentially on its own to survive inflation, while the BofE and Government cut each other throats – and yours and mine.
The OBR is meanwhile run by economists who are educated in an academic discipline that possesses no firm, reliable understanding how real economies actually operate, or methodological tools they can rely on; and therefore have no predictive competence, and therefore endlessly issue forecasts that are invariably wrong, and advice on which you can rest little secure reliance. The Government, meanwhile set up the OBR to issue these dud forecasts that are demonstrably so valueless their advice can usually be ignored; but in a real economic crisis now that the Government have disastrously exacerbated and failed to handle, it is now very confident nobody is interested in the OBR opinion or values its input; thus government can now effectively ignore the OBR altogether.
This is roughly where we are. This is how we “do” economics in Britain; the blind leading the blind, relying on inadequate ideologies or methodologies, and dud, talent free political parties interested only in their own political survival, and the cabals who feed them.
Thanks
John
It’s worse than that isn’t it?
The OBR was a cunning construct to support a lie that Labour were crap at running the economy, so this false ‘intellectual’ body was created to give ‘objective’ reviews on Government behaviour and legitimise it where agreed. Typically Neo-liberal cod-intellectual tactics.
Now it seems that Truss and Co have no pretence of coating their polices with intellectualism and have actually pushed the OBR out of the way.
In other words, they’re not even going to bother to cover their tracks this time.
I don’t know whether to laugh or cry.
We have literally entered the realm of kamikaze economic policy in my view.
I wonder if they are working against each other so much. As you have pointed out before, Section 19 of the Bank of England Act 1998 makes it clear that the Government can tell the BoE to do what it wants.
Now, we know that raising interest rates favours those with savings (ie the wealthy), and also those cash buyers (rentiers) that can cheaply pick up the inevitable mortgage defaults. We are also anticipating that this “fiscal event” today will favour the already wealthy.
Sounds like working hand in hand to me in the worse possible way.
Wow, you beat me on cynicism
This too had occurred to me and is in-keeping with (1) the enabling of transference of stressed assets to the rich and (2) enabling the rich do so at scale – we’ll start to see banks get back into the real estates business again as we did in the mid to late 90’s (did they ever stop)? It’s win, win win for those like banks and their greedy clients.
The Tories never let us down easily do they? They create booms or mismanage crises then just do an emergency stop which causes so much damage.
But at the back of my mind, I still think that with tax cuts and CoLC payments, the Tories will not let the people of this country have heating AND excellent public services – the latter will be sacrificed in the longer run.
Evidence is beginning to show even now for example in social housing – we need to really to cover our inflated costs in social housing with 11% rent rises in April 2023 but we are told to expect 5% and no more. In my LA this could result in a £3-4 million loss of income.
Remember that the Housing Revenue Accounts are now all handed over to their respective local authorities to manage (but the Treasury still interferes with even our own internal rates of return on loans from the HRA and rent increases – our income – so as ever, the Tories lie). There is no top up mechanism anymore from central government as there was I think pre-2017. There are grants available for development BUT these too can be reduced to such levels that they really just take the edge of the cost of development no matter what inflation is like (it’s not taken into account I think).
Throughout 12 years of Tory austerity, the HRA has now managed/funded more services as the General Funds have shrunk due to lower support grants from central government.
Will HRAs get a bail out too like business? I’m sure that social landlords will lobby too, but will we get anything? Who knows?
The consequences:
We’ll have to lose jobs, or cut wages again (we have lost loads of staff to the private sector and I’m looking too).
We will have to cut our development programme to replace loads of homes we have lost to right to buy made easier by the Tories because our reserves will be depleted.
Councils will face having to liquidate more assets to get hard cash – selling land that they might have allocated to social housing replacement and indeed selling off council housing as it becomes void (when tenants move out).
The Labour decent homes works in the early 2000’s is now all coming up for renewal – so there will be less money for that renewal and therefore stock condition standards will begin to fall. Cue the Tories not doing stock condition surveys in the future to hide the malaise.
What we are looking at really is a complete melt down in affordable housing.
So, the Tory aim – stated on 2010 – to reduce the share of GDP of the public sector is still really on track – they’ve just found another way to do it. It’s their big idea isn’t it – like Tolkein’s Ring of Power – no matter what happens, the Ring is always seeking to get back to Sauron.
And no matter what happens, the Tories still believe it is their job to get rid of the public sector. This objective will endure, come what may. Top marks I suppose for focus.
And this is not just because of ideology, it’s because it provides opportunities for the Tory funders and backers to obtain public assets and to control and benefit from even more of our country.
It’s endogenous growth for the rich at the expense of everyone else – just what BREXIT intended – an island turned into a thief-dom (sic) for people like Jacob Ree-Mogg.
May I record how much I loath the Tory party, its backers and enablers in Whitehall?
You are my sworn enemies in eternity.
Thank you.
Apropos cynicism; much activity in the £-shorting markets recently?
Not by me
But by others? No doubt
I think you mean the Falkland Islands?
No. I think it is you who has it wrong
This is akin to owning a car with two steering wheels and then having two drivers steering in opposite directions.
We’re going to crash.
Agreed
Oh dear, oh dear…….. unless you are a *anker, energy exec, property developer, tax avoider, and very well off we are all now well and truly fc*ed.
If you claim benefits you are fc*ed. If you are first time home buyer you are fc*ed.
Sterling is now taking a hammering. Cost of govt borrowing is now even higher than before his speech.
He didnt even mention the words ‘NHS’, ‘environment’, ‘climate’, ‘public services’, ‘transport’ and ‘infrastructure’ – that should tell you everything you need to know.
It seems to me that this is just another in a series of mass pile ons for the very wealthy. Grabbing all they can while they can. What is remarkable is that they keep getting the opportunity. After all how many times are we going to allow our government to hand over more money to their friends?
Nicholas, the short answer to your question is: as long as there is a Conservative Government in power.
Not forgetting that the government is also in a battle with the unions. I have just heard Leadsom say that the statement will mean businesses creating high-level high-paid jobs. At the same time they are saying that those people in unions should not have pay rises, but MPs can have tax cuts worth nearly £1000. I never imagined them getting rid of the 45p tax band. That’s really rubbing people’s faces in it.
I’m not aware that it’s been said yet, but the lunatics really have taken over the asylum.
Are they actually steering in opposite directions at all?
If you mix a tax cut for millionaires, with higher interest rates, you get a greater return for wealthy people from their capital. This helps the wealthy keep the value of their savings more easily, when inflation is increasing.
In order to think they are working against each other, you have to believe the bit about caring about growth, or caring about how the average citizen is doing, or the overall health of the economy.
If you dispense with all of that, and think “what is best for the richest”, does it then make any more sense? I think I am challenging the assumption that they actually care about fixing problems here at all.
Mr Gilbert,
You assume they feel a need to “make sense”. We live in the age of post-sense politics. Cambridge Analytica, Cummings and Brexit taught the Conservative Party that in the new 21st century political world, they could dispense even with the appearance of sense. What works? Prejudice, prejudice, prejudice. Spiced and boosted by PR and Spin. That’s it. Facts are irrelevant. Data is king.
All that is needed are the finacial resources to monitor the public mood, in relentless detail. Persuasion is so last century. Arguments are redundant. The Party reflects the public mood, but not public ‘opinion’ in any rational sense; it plays to something base but motivating – prejudice. The appeal required is to the prejudices of quite distinct silos of targeted audiences; the elderly Thatcherites; the Neoliberal ideologists; the anti-immigrationists; the anti-Europe parochialists; the oligarchs; the diehard Unionists; and so on. It does not even matter if the different messages actually cohere; nobody is counting, there is no audit, no accounting, no reckoning – until it is far, far too late. This works because of FPTP and a parliamentary system that is designed, first and last, to serve dogmatic factions organised into intolerant, self-serving Parties with a single obective – to stay in power (Downing Street), no matter what.
I hope that helps.
Well said
Bravo!
As they will no doubt claim success if they can manufacture any sort of increase in GDP it is perhaps a good time to revisit Robert Kennedy’s thoughts on that measure from 1968 https://www.youtube.com/watch?v=77IdKFqXbUY
My understanding of MMT is that it shows that interest on government bonds provides income for those who have savings. Bonds are held too by pension funds and insurance companies, among others. Given that Government debt is around 96% of GDP, a rise in interest rates represents a bigger income stream to the economy than will be lost through any lack of investment caused by these higher interest rates. Investment amounts to less than 25% of GDP, perhaps a lot less. I also understand from MMT that the money to pay the interest comes from the deficit spend itself. The money is issued/spent first, and taxed second. The deficit finances itself. I thought this was an accounting fact. It is not an argument about whether the deficit is appropriate. If real resources aren’t available to be mobilised it will be inflationary.
Therefore, even if the government insists that the non-government sector buys bonds, hasn’t the money to buy them already been provided?
The positive income effect from raising interest rates will out weigh the negative effect caused by reduced borrowing. I believe historical data across economies tends to show that when economies have large government debt to GDP ratios raising interest rates increases inflation; not only is demand increased through the increased income stream, but firms factor in increased borrowing costs and mark up their prices accordingly.
You get some of MMT but that is not the MMT view of interest
MMT argues for very low interest rates
Yes most MMTers want ZIRP. Some suggest an increase in pension income to offset the loss of income from savings resulting from lower interest rates.
Nothing I said implies that high interest rates are desirable per se. And my comments were consistent with the Kelton Curve.
BTW the only empirical test that I have seen on the relationship between interest rates and economic growth,with Granger causality tests, is that they are positively correlated with it and follow it, as opposed to preceding it. So low interest rates do not neceasssrily promote growth and high ineterst rstes do not necessarily prevent it. As Japanese experience shows, low interest rates have fior decades failed to induce decent growth or cause inflation. I would suggest that a full analysis of mmt facilitates an understanding of these somewhat counter intuitive results.
Is this a precursor to taking control of the MPC back to government, surely that’s the only way any sort of direction, right or wrong, could possibly work?
But they have said they won’t
Mayhem will happen
What do you think about this https://twitter.com/nathansldennis/status/1573347173080928256?s=20&t=Oqmxn0icxwujoND21cLkcQ
Plausible
This thread is by a very long way the only credible explanation of the pattern that is emerging. It makes alarming sense both viewed in the current short term and, perhaps more significantly, even more sense tested against both the relatively recent past and the deeper past of the whole Brexit camapign and its odious and greedy backers
This IS exactly how asset stripping is done and the motives are boundless greed with absolutley no compunction for the damage done – not only on poor and relatively helpless individuals and families – but also with zero interest in the well-being of comunity or country. In medieval times such predatory and treasonous behaviour would have been honoured with appropriate penalties. Where are real monarchs when we need them?
The great Kwarteng swindle
You couldn’t make it up. Andrew (can’t remember surname) gov of bank of England has been bleating on to us for months telling us “not to ask for too much of a payrise” as if we do “it will raise inflation” and on his half a million a year salary, he wants us to cut back, not himself. So his group of merry naive men keep raising interest rates to make sure we haven’t got any spare money to spend for fear it will “raise inflation”.
Then we have arrogant, grinning snob, Kwarteng doing exactly what will raise inflation-giving those already on £150,000 a year, (the poor loves), another £10.000 a year to spend! But he doesn’t equate that with raising inflation. Nor does he equate scrapping the cap on greedy bankers bonuses with raising inflation. No. The stupid illogical thinking of this lot is that it is only if the poor have any money left over for a coffee or a beer out after covering their high living costs on their poverty wages that will raise inflation AND THEY MUST STOP US!!!
What backward, stupid hypocritical ignorance the very wealthy display.
Oh and just for an extra kick in the teeth for the impoverished, they will have their measly amount of universal credit reduced if they don’t find more poverty wage work offered by those at the very top-employers.
Yes, the single mum who has to juggle childcare, school pick up and drop offs, school holidays and child illnesses and trying to be there for her children so they grow up feeling supported and loved and helped with homework as well as holding down a job and running a house alone. Yes, spoilt privately educated, grinning snob Kwarteng wants to take what little she has to survive on from her. After all, they need that money for MPs expenses and treats.
The tories have stooped to a very low place. They are quite simply, heartless and cruel without any humanity or conscience.
But one thing they fail to see is that this ridiculous and hypocritical stupidity will definitely lose them the next election. They haven’t got long in power now.
We can hope…..
Quarteng, like all Tories, bankers and wealthy fat-cats, despises working people. Tax cuts for millionaires, will benefit HIM and his rich chums. Those rich chums donate to the Tory party. An old boys club.
Tory greed-is-good ideology (dogma) is a religion to such heartless bastards. No tory has the slightest molecule of compassion for anyone else.
Being a Conservative politician is a statement of their pride in being bastards. They ENJOY it. None this has any connection to the reality of global economics.
My question is; why has Scotland not already left this pitiless backwater before now?
Scots are the only people in the UK with the constitutional right to stick two fingers up to the Tory government. Now we know 53% of Scotland now wants out of the UK. Next year, they will be gone.
I feel sorry for any non Tories in England and Wales. Those poor wretches, are doomed to become the new peasants of the 21st century.
If Scotland does not get the hint now it never will
A Scottish pound would be worth much more than sterling now
One way of looking at this is that this is just a bribe to the wealthy in order to ensure that the Tory party is well funded for the next general election where they will outspend and outfight Labour to stay in.
That’s the message to the rich here – stick with us – let’s look after each other.
It subverts the only reasoned weapon we have to change things – the vote, democracy itself.
This morning I read the Nathan Dennis tweet (quoted by cathy s above), also the protest from RSPB about giving swathes of the country over to private companies. I thought, we are watching ourselves being robbed in broad daylight and there is nothing we can do about it. Over the next two years, every asset we own as citizens will be sold off at cut price. If there is an election in two years, a new government will have to buy or rent back each stolen asset at twice the price. We will not even own half our country. As a third world country, there will be no way of helping the majority of our citizens who have been left destitute.
I find it useful to think of the UK as a plc, with the government as its board, and its citizens as its shareholders. If the board of any ordinary plc acted as this government has, taking bribes, and selling off company assets to their friends, they would spend the rest of their lives in jail.
Labour needs to out in notice now that it will cancel all such arrangements without compensation
Agreed, but it may not be so easy. The sale of Britain will be on international markets and subject to business-friendly international arbitration. The ultimate irony is that the British may find themselves migrant workers in what was their own country.
Maybe….
But regulation can arrest that
On a brighter note, I am trying to work out if there is a way that the Scottish Government could simply buy Scotland in the Great British fire sale. Easier than a referendum.
🙂
Richard any chance you could limit the number of characters on this reply form, too much waffle from readers here, make your point succinctly please.
Well all I can say to the BoE is careful what you wish for, you now have high market interest rates than will only climb further. The fall in the pound is going to exacerbate inflation. QT will have to be put on ice most likely.
I’m tired of journalists allowing politicians to come on television and not holding them to account. We now have a situation where Tories will only speak to certain programmes because they know they will get an easy ride. 12 years of government enables this sheer arrogance. I think it’s time we went after the media organisations not just the politicians
I note the suggestion but if people want to publish relevant material here I have no problem. Only I have to read it
James, who are you to determine what is “waffle?” Your comment might be waffle to someone else, but hopefully they wouldn’t be so rude as to state that.
The reasons journalists don’t hold politicians to account is because they are reading questions from a sheet, have no real invested interest in the replies, probably don’t have a passion for politics and have short memories or are too young to remember previous government policy promises or commitments. They also have no time for any in depth analysis. They are also wealthy, and therefore do not really understand anything about life in the school of hard knocks. All media is stuffed with the same types of people. They haven’t really got a clue about hardship or living in poverty, so actually holding politicians to account and challenging their weak answers and truth avoidance doesn’t matter to the journalists. We need working class people with long memories and a passion for truth and justice in journalism, but they never get the chance.
Oh and you probably think this is waffle too. We all have a right to an opinion, not just you!
‘Long memories’ – Oh Yes!
We need long memories in order to counter-act the re-writing of history by the Neo-liberals.
But also, it appears that our increasingly reliance on tech is having an effect on our memories – even maybe our collective ones. We seem to know increasingly know where to find information in order to retrieve it these days more than what it is in the information itself.
https://journalistsresource.org/media/google-effects-memory-cognitive-consequences/
I actually have the Sience paper (Vol 333, 776 (2011) referred to above which I looked at for my MBA.
Some might find this a rather scatological issue but given that ‘he who controls past owns the future’ we should remain vigilant given Mirowski’s highlighting of the Neo-liberal’s capacity for making their own reality.
What will happen to this blog in the long run? Will it be allowed to stay here, or will some unaccountable entity order it to be taken down one day in the name of heresy?
It makes you wonder.
No it’s not waffle, you’ve made your point. Some commenters are bordering on illegible, perhaps if they saved Richard a little time he could spend more on other things. Punchy is best, otherwise go and fetch an economics textbook.
James
I am not complaining
But it is fair to note long comments often take more time to get moderated
Richard
Incoherence is no stranger to Tory policies.One explanation of UK low productivity and growth is incoherent economic policies , I have read