This was the FT's UK homepage on its email listing this morning:
The FT thinks the UK is in trouble. They also think Truss and Kwarteng are in trouble. And they are right to do so. This was the overnight US dollar / pound exchange rate chart:
That is a record low for the pound. But as interesting is this chart for the last year::
Of course, the dollar is doing well, but the clear indication is that the markets have lost faith in both Brexit and the Tories. And this is not just with regard to the dollar. This is the euro chart for the last year:
This is grim, however it is looked at. So, what does it mean, what is the solution and how likely are we to get out of this without being hurt, very badly?
The answers are all linked. The first thing to say is that there is no sterling crisis for the government. We have no overseas borrowings of consequence in any currency but sterling. As a result, the UK government has no problem settling its debts despite this fall. As a consequence there is not going to be a rush to the IMF or someone else for a bailout: we simply do not need it.
Second, this means that this is a private sector crisis at this moment. These awful exchange rates mean the pound is buying a lot less, but most especially a lot less petrol and gas per £1 spent, and that translates directly into UK inflation. By how much depends on whether this is just a blip or a long-term readjustment to value the pound at this rate, and we do not know that as yet. But that there will be inflationary impacts is beyond doubt.
Third, that also means that the Bank of England will react with interest rate increases. These could now be horrible in their scale - with rates going to in excess of 5 per cent. If so this crisis will turn into a mortgage, rent and housing crisis, to be followed by a banking crisis as house prices fall and banks lose the security in the properties that they have lent against. There is therefore very real threat in all this.
Fourth, contrary to the opinion of the presenter on LBC News who has just interviewed me, more tax cuts will not solve this or calm the markets. They will simply leave the market more panicked as they will increase borrowing still further.
Fifth, nor will the austerity that The Times is forecasting on its front page today help either: cutting real spending on the public sector right now as planned will make public services even worse, leave people without pay to make ends meet and create further downward pressure on the economy when the Chancellor says he wants growth.
Sixth, nothing will solve this until Kwarteng says how he is going to fund the programme he is running, which he has not as yet, which is his major economic crime 0f the moment. Markets think he wants to borrow maybe £250 billion in the next year, just as the Bank of England says it will also be selling £80 billion of gilts it owns. So more than £330 billion of funds is being sought by the government in the next year as a result of this incoherent policy. Nothing like that sum has ever been sought before. In the big years of supposed borrowing, like 2009, 2020 and 2021 quantitative easing covered all borrowing and markets were hardly called upon at all to fund government debt. Net of QE that debt is now about £1,600 billion. You can see why markets being asked to fund nearly a fifth more of that in one year is spooking them.
So, seventh, the answer is in the form of QE. It quite literally cannot be in anything else. However, that will require cooperation from the Bank of England and it is not at all clear that they will play ball. Having a government / Bank fight in the middle of all this would not help, but it may be necessary. Only the cancellation of the Bank's plan to sell bonds and the use of QE to cover government deficits can work right now.
Eighth, even that is not enough. As I have explained on this blog, QE increases what are called central bank reserve accounts. These are funds held by commercial banks on deposit with the Bank of England as a result of QE. Bank base rate is paid on these, and this is going to be far too expensive to manage over years to come, so not only must government money creation via QE be used to pay for the deficits to come but the resulting funds must be injected into the economy via new special bank reserve accounts, which are the same as central bank reserve accounts but with little or no interest paid on them.
I literally cannot see anything else but this working right now. The proposal is radical and in uncharted territory. But that is where we are and what is required. We cannot fund the deficit to come with market borrowing, because that will destroy the economy via a mortgage crisis. We cannot pay the interest on borrowing at the rates that will be demanded if we try to do so because that will crash public services with the resulting austerity. So we have to use money creation without interest being paid to solve this mess.
I have nothing more to offer than that: the right of the government to create money costlessly is the only way out of this. Markets will have to be cut out of the funding equation, in other words. That can be done. It needs to be done, and the government needs to say it is doing it, preferably today.
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“the resulting funds must be injected into the economy via new special bank reserve accounts,”
The money could be injected as follows: There is one area where the Uk makes stuff and adds value from within the economy: insulation. For example: Rockwool have factories in the UK. Uk workers could install the stuff – and this activity would be unaffected by the £ tanking. It would materially make UK people better off.
I am very confident that this will not happen. Kwarteng Trussed & Co have no interest in the well being of Uk serfs, only in following the suggestions/ideas/orders? of the scum that infest Tufton St. We are in the land of belief systems a place where sense/logic has no place.
That’s the follow on Mike
I was talking technical issues on central bank reserve accounts
In Scotland the Scottish Conservatives are pushing the Government line, and spinning the neoliberal-populist media line that Scotland must follow the Chancellor and cut income tax across the board (but with Delphic ambiguity, asking the Chancellor to be specific about borrowing); supported by BBC news interviewers (BBC Radio Scotland GMS for example) who think “impartiality” means presenting the Government line as the conventional wisdom.
Last week a BBC radio interviewer seemed to think they could safely wrap up “impartiality” as represented by the argument that a windfall tax, as already executed would raise only £5Bn-£15Bn, while the Government was subsidising energy by £66Bn. Conveniently ignoring that Bloomberg (which it seems unlike the BBC is plugged into real private sector business sources), was forecasting the UK energy sector would produce £170Bn ($199Bn) of largely windfall profits over the next two years. Indeed that excludes the currency effects of oil being dollar ($) denominated commodity; thus the £170Bn for eg., BP and Shell is now even greater as sterling (£) tanks.
The mainstream public debate in Scotland is being channeled into witlessness, not least by the media (their “journalists” are frankly in most cases out of their depth), if the media can only pull it off. This is how extreme neoliberal Conservatism thrives in chaos. The chaos they work to create is not just in their economics, but much more effectively in how they manage news and opinion. For example only, nobody in the media ever challenges the impartiality credentials of the ‘think tanks’ the broadcasters assemble to tell not just the public, but the journalists themselves; to tell them how they should think about the issues.
Completely agree about journalism – but what a job it is these days in the context of pay and conditions especially at the sharp end – they are paid for ‘stories’ – not research or due diligence – it’s about delivery – no matter how bad the tosh is. That’s how it comes across to me. No time or interest in asking why – just circulate!
That’s why the Carole Cadwhalladr’s and others of this world are so precious.
So will the BoE call an emergency meeting or leave things as scheduled to discuss Interest Rates ?
Also, gentle reminder that the end of this week sees the new energy price caps coming into effect.
This is truly grim.
See thread just posted
Neither borrowing nor money printing will calm the currency markets. We will be importing inflation for a good while. Money printing has a consequence and that is the currency. yes we don’t have borrowings in dollars but we have inelastic demand for energy and many components which effectively has the same implications. Unfortunately for the Kier Starmers Government in 2024 it will be austerity all round.
Kwarteng as a former analyst and employee of Odey surely must have had some idea of what the reaction would be? It is beyond belief the risks that he and Truss are taking. That said I wonder how it is that Odey’s main fund is up 145%. The skill and knowledge of the firm must be amazing to know what was about to happen!!
Roughly what time were you on LBC? With Nick Ferrari?
I was on LBC News at 7.20
That is not LBC: it is their news channel
Totally agree, especially the last para which says it all really.
But already the Tories are looking at where to cut back elsewhere based on a confusing use of the tax and spend narrative and market ideology.
And what’s worse is that they are actually just moving money around – I don’t really see any of this actually ‘making new money’ – it will result in more mal-distribution, losses for many, profits for the few.
I fear the worst really. Despite how bad the previous Tory administrations have been over the past decade, I’ve at least had some expectation that they would at least try to do something to stop an economic meltdown from happening at the last minute, such as preventing a banking collapse. For all the criticisms, they at least implemented the furlough scheme.
Not that they would do this to benefit ordinary folk, but in the interest of capital and their wealthy voter base not being served by an economic collapse.
But now it seems like we have an utterly clueless team in charge. They are more likely to go with something like economic shock therapy than taking a sensible appraoch. They’re gambling, and they are not the house.
Benz0
Don’t forget how North Sea Oil revenue effectively propped up the economy as Thatcher adopted hard line monetarism OK?
The Tories were lucky – not competent Benz0. That is why they are trying it again, because they were oblivious to facts like that and the myth of the Thatcher ‘wonder’ years was sustained.
Any Government would surely do a furlough scheme if only to keep revenue coming in on the false basis that it pays for stuff – like most politicians do. And how careful were they when they gave away their money to furlough without adequate cheques as they did with the PPE scheme ‘procurement’.
But Tory stupidity is deeply entrenched. Never forget who you are dealing with.
Thanks for this.
Its like Kwartengs’s laboratory experiment. Your accountancy approach – where everything has to add up in the end – gives the very clear and simple conclusion that ‘non interest paying QE’ is more or less inevitable. Fascinationg – with the lives of millions at stake. Looks like we will know some of the experiment’s results and about your prediction quite soon. It will certainly teach us more about how govt/BoE/markets etc. relationships works in practice
If the last two weeks were Gilber and Sullivan gone mad – this must be Stravinsky – with the economy forced to dance itself to death.
There’s a lot more to Stravinsky than the Rite of Spring! : – )
More Saint-Saëns, ‘Danse Macabre’; especially as thestory of the dance of death takes place at Holloween; seems apprporiate for this………
Holloween? Even more appropriate, for the hollow men and women of this Conservative Government.
The Hollow Men, TS Eliot. The opening stanza ….
“We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats’ feet over broken glass
In our dry cellar
Shape without form, shade without colour,
Paralysed force, gesture without motion;”
you catch the drift…..I leave the thought with you, and the full text is easily found.
“New special bank reserve accounts”. Interesting idea, and at least you are looking for constructive solutions rather than just moaning about the pound like all the media this morning.
I guess there is an alternative. At one point I had a current account which paid interest on the first £2,500 – but nothing thereafter. Why can’t the Bank of England structure the current central bank reserve accounts in the same way? The commercial banks can’t really complain, it is a structure they use themselves with their own customers.
What I am suggesting is a form of that
Richard,
You made the point about banks being awash in savings, and not paying the interest rates to savers they are charging borrowers (accounting for margin), on Radio 5 live this morning; which is far above the margin spread of normal times.
Notably, at Government/Treasury level, the best NS&I rates available now for savers are 3.0% for fixed term Green Bonds; but only 1.4% for Premium Bonds (the 1.4% set in June, 2022, raised from 1.0% which had first been set June, 2020); and which represents the substantial majority of NS&I invested funds; while Green Bonds remain a tiny, almost immaterial proportion of the total NS&I £200Bn which froms part of the National Debt. Even the Government is benefitting; ordinary savers are quietly being ‘screwed’ for the guaranteed security (but their currency is tanking) – commercial banks and the oil/gas producer sector are living high.
Agreed
The way I look at things is as follows:
Money is an institution of the state.
It is created when the state spends and is destroyed when the state taxes.
It is also created by commercial banks when they lend and destroyed when those loans are repaid. However these banks operate under licence from the state and so, in the last analysis, the state controls to whom, and under what conditions, the banks lend.
Fundamentally the two processes are the same as the state makes all its payments through its central bank, an important difference being that, while commercial banks need to make a profit, the central bank does not.
A government that denies all this is not only wrong, but it is acting irresponsibly. It is akin to one who built a steam engine without taking into account the theory of thermodynamics. He/she would be responsible for any injuries caused if the engine blew up.
Agreed
Hi Richard. All current issues aside… What would it mean for UK sterling to hit parity with both the US Dollar and the Euro? Might be a silly question, but hasn’t this been on the cards for some time?
It has not been in the cards
It could, but probably won’t mean more exports because exporting from the U.K. is far too hard now
It will mean much more expensive imports
It will fuel inflation and interest rate rises
It crashes the economy
Apologies but I’ve not caught up with all the commentary, analysis and expert opinion on role of MMT and and am just trying to make some sense of it all.
Granted that I should really do some more searching/reading of my own but in the interest of saving time and becuase i am just being lazy – is it right to say that this is all bringing us somewhat closer to a MMT way of thinking? So its totally bizzare but a Tory govt is now somehow trying to print more money (from the magic money which they say does not exist).
Have you quoted the lines from Rees Mogg yet – or is it not appropriate here – if so why not?
For what its worth – I think the govt are going about it in entirely in the wrong way (i.e. raising funds through markets and not QE or printing money) and that MMT advocates govt spending in altogether total different sectors and through different means etc etc and that the tax cuts announced are all going in the opposite direction to MMT. But the underlying assumption, starting premise here by govt is in line with MMT i.e. that S(TAB) and its NOT – (TAB)S (S Kelton’s book Deficit Myth). Am I right?
If you’ve already done a piece on the mini-budget and MMT – pls just direct me to the right place.
If not, is there a need to analyse, compare and contrast the mini-budget v MMT? (one for a future blog perhaps?)
Read Stephanie Kwlton on the issue on her Substack blog