I have already noted that the FT has this morning, noted that Rachel Reeves is offering Tory economic thinking as if it is Labour policy. The Guardian is also getting in on the act. It, too, is noticing that her thinking cannot be delivered because it flaws within it, long noted on this blog.
As they note in an editorial this morning:
The Labour party has in mind new institutions that will capitalise future-facing industries, create good jobs and see Britain catch up with its peers. That is one message from Rachel Reeves's speech.
They add:
Her Labour colleague John Eatwell suggests she is inspired by Alexander Gerschenkron, whose seminal work concludes that the way the state was organised influences its ability to adopt income-enhancing technologies. Many of Labour's proposals, such as Great British Energy, are welcome. But this column has been sceptical about whether they would meet the scale of the challenges Britain faces without substantial funding or effective mechanisms for socially directing investment.
Saying so, they note the chilling effect of the Bank of England and its policy of quantitative tightening on the economy. Not only is this intended to keep interest rates well above their natural rate by oversupplying the market with gilts, which keeps their price artificially low, keeping the interest rate paid on them high, but it also has another effect.
That other effect is to realise what seem to be losses on the resale of gilts purchased in the past by the Bank of England. In my opinion, there are no such losses: the purchases and sales are, in fact, unrelated policy decisions. That, however, is not how the Bank sees it, and nor does the Treasury, because they view these issues as if they are microeconomic concerns of separate entities and not and not macroeconomic management issues of a single entity called the government. The result is that the Bank puts pressure on the government to reduce its spending by creating supposedly realised losses that it must account for, reducing its capacity to spend elsewhere.
This is the dead hand of neoclassical/ neoliberal economic thinking that fails to take into consideration accounting reality. The consequence is the deliberate creation of an environment where austerity can be demanded where none is required, and to do so is utterly counterproductive to the well-being of the country.
Reeves very clearly has no intention of challenging the quantitative tightening bind sales that are planned at about £100 billion a year, not a penny of which will be used for any constructive economic purpose. If she does not, whatever else she says is meaningless. This policy is intended to thwart any ambition she has and will do so unless she challenges it head on.
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Thank you, Richard.
Further to Labour’s reliance on technology, another euphemism, readers and you may be interested in this post, https://www.nakedcapitalism.com/2024/05/tony-blair-and-his-associates-are-waiting-in-the-wings-to-seize-back-power-in-the-uk.html.
Thank you Colonel. I read this first on Naked Capitalism and I urge everyone to read it.
The appended comments, the “deep dives” by Froghole and Revenant give very useful back- history.
A return of Blair and his bunch is indicative of the mess we really are in, and the increasing sense
of ever deepening hopelessness and uselessness that the New New Labour government will bring.
Thank you, Karl.
Oh my, isn’t Blairite hegemony substituting for a party of the left a truly frightening prospect ? Thatcher reincarnated ?
Beware of men with enormous egos/
Thank you, Richard.
Richard writes: “That, however, is not how the Bank sees it, and nor does the Treasury, because they view these issues as if they are microeconomic concerns of separate entities and not and not macroeconomic management issues of a single entity called the government. The result is that the Bank puts pressure on the government to reduce its spending by creating supposedly realised losses that it must account for, reducing its capacity to spend elsewhere.
This is the dead hand of neoclassical/ neoliberal economic thinking that fails to take into consideration accounting reality. The consequence is the deliberate creation of an environment where austerity can be demanded where none is required, and to do so is utterly counterproductive to the well-being of the country.”
This is very much the thinking from when Mervyn King was appointed chief economist. As governor, especially from the tremors of August 2007, if not the US banking data releases of the spring of 2007, that line hardened. An obsession with internal devaluation emerged. During the eurozone crisis, it was joked that the Treasury needs to become independent of the Bank. Both institutions are neoliberal and need reform.
The constructive economic purpose is to reduce the money supply that was increased during COVID times. As we know the relationship between the money supply and inflation.
But this was always planned as a fundamental part of QE, and why QE was carried out as it was, so that it could be reversed when the time was right. This was clearly signposted by the Bank of England at the start and been confirmed at regular intervals since, although you frequently denied it would ever happen.
It’s therefore no surprise that you are still pretending that there’s no reason for it – you didn’t understand then, so why would you understand now?
What do you not understand about what I said?
I am clearly disagreeing with the BoE. So you can’t say I am wrong beause you think they would think so. You have to argue with what I said – showing it to be wrong. You have not. Why not?
Katie, you suggest that QT is necessary to reverse the QE during the start of the ongoing pandemic. However, what is important is not just the amount of money created but where it ended up. The QE money eventually ended up going to the rich. As Richard, notes, the current QT is not directly related to the COVID QE, despite the Bank claiming it is. QT will “reverse” QE in the sense of reducing the amount of money in the economy, but it won’t reverse QE in the sense of the increase of money that ended up going to the rich. As Richard notes, QT will make things worse for the bottom and middle, including through increasing pressure for more austerity. The QE increased the money supply and made the rich richer, while QT will reduce the money supply but make the bottom and middle worse off but not the rich, so this is not a true reversal.
QE followed by QT does not get you back to where you started but is actually a process for transferring wealth upwards.
If you want to actually reverse the COVID QE, you need to reverse both the extra money and where it ended up. Richard has suggested how to do this with his taxing wealth report, which will both reduce the amount of money in the economy and do so by reducing the money held at the top, while at the same time having little negative effect or having beneficial effects for the bottom and middle.
QE followed by QT transfers wealth from the bottom and middle to the top
QE followed by taxing wealth makes the bottom and middle better off
If you are solely dependent for income as beneficiary of a trust fund set up by your wealthy parents Katie do you bother setting up a balance sheet to record this relationship?
I’ve been thinking this too – why, for example, do we see the useless chancer Hunt snivelling about fixing the economy by sanctioning benefit claimants while the BoE are shrinking the economy by many tens of billions of pound a year? How is it this nonsense goes unremarked?
Morning all, I’m not an economist so go easy! Having read comments above re QE/QT, one simple but obvious point to raise.
What would be the issue should govt remove BOE independence for monetary responsibility? BOE are not elected by the public, yet weald a heavy hammer on everyone’s lives and seem to be at the root of all current monetary evils.
Regards
Andy