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Getting the Box to Work

(Correction – The following is a reworking of a recent blog in which I misspelt the name of the Chancellor Kwasi Kwarteng for which I apologise.)

When I was a child we had a black and white television with vacuum valves which had to heat up
before the set would operate. A common fault was when the horizontal hold failed, causing the
image on the screen to roll up or down making it impossible to watch.

At the back of the TV there were some small knobs that you had to twist to try to resolve the
problem. This, however, was fiddly and the turning so sensitive that the image rolling down the
screen would pause before changing direction and rolling up the screen.

When this happened, my dad, who had no training in electronics as far as I know, would start to
tap the side or the top of the TV. I often tried to identify a sequence to the tapping but it seemed
to me to be completely random, except that the longer it took to stop the image rolling the harder
the tapping became until my dad gave the set a solid slap to both the top and side.

The result of all this tapping and slapping was rarely positive. Turning the machine off and
allowing it to cool down, and then turning it back on again sometimes worked. But more often
than not we had to get the TV repair man out to fix the problem.

I was reminded of all this by the budget, which dare not speak its name, on Friday. Mr Kwarteng
seemed to be adopting my dad’s approach to fixing economic growth. However, he seemed to
have missed the gentle tapping stage. He went straight for the slapping stage and then
augmented this with a hammer.

Very occasionally my dad’s approach seemed to work. His disdain for the technical levers of
change and the approach of technicians, and his sharp rejection of advice were rewarded by the
sudden stabilisation of the picture…for a while.

If my dad’s engineering strategy failed and broke the telly the worst that would happen was that
we would miss Bonanza or Sunday Night at the London Palladium. Mr Kwarteng’s risk appetite
appears to be much greater. What is more he has made it clear he has not finished hitting the
black box of the economy, Friday was only the beginning.

We can only hope his unconventional approach, disregarding the views of the economics
profession, Treasury officials and basic arithmetic, works. However, I never had much faith in my
dad’s approach to fixing the TV. I have a lot less confidence in Mr Kwarteng’s approach to fixing
the economy.

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Pickling Dinosaurs

The current leadership competition within the Tory Party is the second in 4 years to cause an interregnum in the governance of the country. It is perhaps symptomatic of a Tory party which has lost its way and is incapable of providing the leadership needed in what are incredibly dangerous times.

Rishi Sunak and Liz Truss are like two dinosaurs battling for supremacy, completely focused on securing victory. Both, seeingly oblivious of the massive meteorite hurling toward them in the shape of the cost of living crisis. Much less aware of the mega meteorite following it in global warming.

Like bad generals they are fighting the last war. Showing no sign of being aware, much less competent to deal with, the unprecedented challenges the country and the world faces.

Jeremy Corbyn was accused of being irrelevant because he was pickled in the politics of the 1970’s. However, Liz Truss is equally stuck in a bygone age. Her world is that of the Thatcherite 1980’s and her prescriptions the same. Lower taxes and the rising tide of economic growth lifting all boats. Wealth trickling down rather than being provided through handouts.

Rishi Sunak has a more balanced one nation Tory approach but very much set in economic prescriptions of an orthodoxy which has shown itself to be increasingly irrelevant. Economic forces seem to be operating in ways not covered by the standard theories of the profession. Increasingly, attempts to analyse what is happening fail to reconcile conflicting indicators providing what some have characterised as humbug economics.

Both candidates seem to be set on reducing the size of the state. This is a necessary presumption of Truss tax cuts or Sunak deficit reduction. However, in whatever direction you look, the public sector is in crisis, from the administration of justice, the delivery of health and care services, education at all levels, utility infrastructure and costs and much more. When this is combined with increasing demand in all these areas the reduction in the role of the state looks a very optimistic idea.

The sound and fury of the competition has probably done more for the prospects of a Labour or progressive alliance victory at the next election than secured the future of the Conservative leadership.

For all the noise there remains an absence in the realm of political debate. A failure to focus on issues which are becoming existentially critical. Issues which call for integrated national and international resolution.

In the broadest terms they relate to equality and justice and are set to be driven by the issue of climate change. This will involve the radical restructure of national and global economics, voluntarily or otherwise.

Sunak and Truss are both desperate to tell their electorate what they want to hear. Leadership is about telling them what they need to hear. Even if that is unpalatable and potentially career limiting.

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On the QT

Since March 2009 the Bank of England (BoE) has been engaged in an experiment to stimulate the UK economy. The experiment was commenced in the aftermath of the credit crunch when banks stopped lending to each other because they were no longer certain of the creditworthiness of their counter parties, ie. other banks. The economy was in recession with negative GDP growth at -4.3%, and inflation at -0.53%. The Bank had reached what it felt was the lower bound of what it could do with interest rate policy having taken Bank Rate down to 0.5%.

Enter Quantitative Easing) the experiment which involved the BoE creating money and using it to buy assets, overwhelmingly, government debt. The goal was to increase the level of liquidity, ie. money, in the economy. Buying government bonds (government debt) from banks achieved this in two main ways:

First, it increased the cash banks held as they sold the bonds they held to the BoE which theoretically would encourage them to lend the cash to secure a return.

Secondly, by increasing demand in the bond market it pushed up the price of bonds which had the impact or reducing their yield, broadly the fixed rate of interest paid on the bond which obviously goes down if you pay a higher price for the bond and up if you pay a lower price.

As bonds are seen as virtually risk free the rate for bonds effectively sets the lower benchmark for all interest rates thus putting downward pressure on rates making borrowing money cheaper. The benefit of this is that, in theory, it encourages people to borrow and invest in productive assets thus stimulating growth in the economy.

In the years that followed the UK economy did begin to revive peaking at 3% GDP growth in 2014, slowly falling back to 1.7% in 2019 then collapsing with the advent of Covid. Given the patchy and declining performance and subsequent collapse of the economy, QE was continued and now amounts to a £895bn of bonds on the balance sheet of the BoE.

Interestingly, £875bn of the total, or 98%, is government debt, ie. bonds issued by the UK government. Given that the bank is wholly owned by the UK government this appears to mean that c37% of the government’s national debt is owed to the government! Interesting debate with Modern Monetary Theory around this.

However, we are now in a changed economic environment dominated by rising inflation and the spectre of stagflation. Given this the BoE has had to change direction and is “unwinding” QE, replacing it with Quantitative Tightening (QT). No one seems to know what the effect of this will be. Some worry that the market for bonds may be undermined and their price fall dramatically. This would have the reverse effect of the purchase programme pushing interest rates up throughout the economy. To some extent this is the intention but the fear is that it may not be a process which can be regulated. Once the tap starts to be turned the market will jump.

The problems this might create are compounded by the long period of ultra low interest rates. Cheap money looking for a home often finds one which is riskier than the investor thinks. When rates go up and the tide of money recedes they are caught swimming in the buff. For businesses this is more than embarrassing, it is a matter of life and death.

If QT happens on the QT everything may be ok. But if suddenly you start to hear a lot about it we could be in even worse trouble than we are at the moment.

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“Ukraine has not yet perished,…”

The title to this post is the first line of the Ukrainian national anthem and has an incredible resonance with the heroic efforts against overwhelming odds.

The people of Ukraine have not just resisted the unprovoked attack ordered by President Putin, they have fought back. It is difficult to know the truth of the Russian losses but at best they are bad. Nato estimates are between 7,000 and 15,000. Those losses have occurred in the space of one month. It compares with around 15,000 deaths in 10 years of war in Afghanistan.

Body counts in war are logistically difficult and as part of the propaganda campaign subject to significant variation. However, what cannot be gainsaid is that the planned blitzkreig by an overwhelmingly large military force has not turned out as planned. The incredible bravery and determination of the Ukrainians has not just mounted an incredible defence, in many areas they seem to have taken the battle to the enemy.

Incompetent though they have demonstrated themselves to be it is difficult to believe the enormous advantages in terms of resources and manpower they can draw upon will not lead to an ultimate Russian victory. Any views to the contrary depend upon a very difficult transfer of power in Russia which there is little sign of at the moment.

Given this, much weight is being placed on the peace negotiations occurring in several locations and at different levels. It is said real progress is being made, albeit slowly, and both sides are tempering their demands to more realistic levels. Agreement is tantalisingly close, some believe. In parallel some safe passage routes out of cities in the North are enabling citizens to escape the fighting.

Ominously, there is no safe corridor out of Mariupol. The bombardment of that city has been relentless and has effectively raised it to the ground by all accounts. The people trapped inside have no running water, declining food supplies, no heat or light. The conditions can only be imagined.

Mariupol is absolutely vital for both Ukraine and for Putin. For Ukraine it is a critical part of its economic infrastructure providing a route to market for much of the countries exports. For Russia it provides a land corridor to the Crimea seized in President Putin’s last illegal war.

If there is a peace deal I suspect it will only come after Mariupol has been taken which will be a blood bath. President Putin will claim any peace agreement should respect Russian control of Mariupol, and withdrawal of Russian troops will be subject to this. This will provide him with his land corridor to consolidate his earlier invasion and provide a way to strangle Ukraine’s economy in preparation for his next offensive in 5-7 years time.

It is not a peace Ukraine can accept, nor the West.

Political leaders in the West are rightly fixated on avoiding a world war that may go nuclear. My fear is this fixation, and the avoidance of Russian / Nato conflict it entails, may actually result in what they are attempting to avoid. The unbelievable sacrifice of the Ukrainian people will then have been for nothing.

President Zelensky’s calls for a no fly zone have fallen on deaf ears. He has now asked for demonstrations of solidarity in the West. We should paint the nation Blue and Gold.