Andy Haldane of the Bank of England is lost in his own land of confusion

Today I wish to examine the policies of Bank of England Chief Economist Andy Haldane who gave a speech on Friday. There was much to consider in it and to set the scene I would like to take you back to the 30th of June when Andy felt that the EU leave vote was along the lines of the end of the (economic) world as he knew it.

Second, even though the economy is unlikely to crash, it is likely to slow, perhaps materially, in the quarters ahead. ……. External economists expect the UK economy to tread water over the next few quarters…….But there is a strong sense of trim and singe.

So far of course he has been proven wrong and it turns out that a lot of this was in Andy’s mind.

This has generated considerable uncertainty about the economy, about policy and about politics – a heady cocktail.

Perhaps the most spectacular error was the implied view for household consumption and retail sales from this.

Meanwhile, among households there are signs of a significant slowing in both confidence and in the housing market, which are often inter-twined……..And where housing leads, the economy often tends to follow.

Whereas in the real world or “reality” which Andy wants other people to get in this is the official data we have.

In October 2016, the quantity of goods bought (volume) in the retail industry was estimated to have increased by 7.4% compared with October 2015; all store types showed growth with the largest contribution coming from non-store retailing. This is the highest rate of growth since April 2002.

Compared with September 2016, the quantity bought was estimated to have increased by 1.9%;

I suppose if Andy is a rugby fan he would have concluded from the first part of the England versus Australia Test Match that Australia were going to win 50-0 and may even have wondered about the future of coach Eddie Jones. Instead of course for those who do not follow rugby England’s unbeaten run continued making fans like me very happy.

What did Dr.Andy prescribe for the economy?

He wanted this.

Put differently, I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison – like another Andy, the one in the Shawshank Redemption. And yes I know Andy did eventually escape. But it did take him 20 years. The MPC does not have that same “luxury”.

Which meant what exactly?

In my personal view, this means a material easing of monetary policy is likely to be needed, as one part of a collective policy response aimed at helping protect the economy and jobs from a downturn

In case you missed the hint that he was suggesting a series of moves there was more.

Given the scale of insurance required………And this monetary response, if it is to buttress expectations and confidence, needs I think to be delivered promptly as well as muscularly.

The August Bank of England Minutes reinforced this view along the lines of “Stand By For Action!” from the opening scenes of the television series Stingray.

If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year. The MPC currently judges this bound to be close to, but a little above, zero.

I put the last sentence in because the early bits were later proven to be wrong whereas it was already known to be wrong! How can you say the “lower bound” for interest-rates is just above zero when the Euro area has -0.4%, Sweden has -0.5% and Switzerland -0.75%?

Of Inequality and Andy’s misrepresentation

This is a big area as Andy badges himself and is presented by the media as someone concerned about inequality. Yet part of his “sledgehammer” was an extra £60 billion of UK Gilt (government bond) purchases which the Bank of England has previously admitted made the rich richer. Actually back in June such a confession was tucked away in his speech.

the headline gains here have been impressive, with aggregate net wealth increasing by almost £3 trillion since 2009……..This suggests these gains have come principally from rises in property and pension wealth

Ah pension wealth! Yes that has soared for Bank of England policymakers but I suspect he is not referring to that as we recall he claims not to understand pensions. Anyway here is a clear consequence of the monetary easing Andy was so keen on more of.

In other words, the gains have been skewed towards those in society who own their own home or who have sizable pension pots.

Back in June he put it another way.

We’ve intentionally blown the biggest government bond bubble in history

Not the biggest Andy you blew a much larger one when you pushed the ten-year Gilt yield down to nearly 0.5%. Should anyone have hedged down there or up there is price terms – I am thinking pension funds and insurance companies here – then the blame should go straight to Andy’s door.

What does our Andy think now?

Presumably he is still on his “more,more,more” bandwagon? Well not quite.

My personal view is that this provides grounds for not proceeding too hastily with any tightening of the monetary policy stance.

There is a screeching hand brake U-Turn implied here as we move from promises of more interest-rate cuts and QE to a possible rise. Perhaps that is why the title of the speech was “red car, blue  car!. Also Andy has of course been part of a Bank of England which promised interest-rate rises via the ill-fated Forward Guidance and then cut before! Speaking of cars how is that sector doing?

UK new car market rises 2.9% in November, with 184,101 vehicles registered on British roads……The growth has helped deliver more than 2.5 million new cars on to British roads so far this year – the first time the milestone has been reached in November.

So not much sign of the collapse in confidence that Andy was so confidently expecting. Another dose of reality for the man who prescribes it for others. Perhaps the discussion of an interest-rate rise is to distract the media from the ch-ch-changes here.

In the MPC’s judgement in November, managing this trade-off was best achieved by maintaining the current monetary policy stance, with a neutral bias on the direction of the next move in interest rates……..My own personal judgement on the appropriate monetary policy stance is close to the MPC consensus

Comment

In many ways the issue here has a background to be expected from a person who has been at the same institution for 27 years. A type of going stir crazy is only to be expected. The most extreme version of this is thinking that life in a bunker in Threadneedle Street in the heart of the City of London allows you to lecture others on reality.After all reality for many involves worries about pensions whereas back in September The Guardian reflected on the insulation and in fact isolation from such worries for Andy and his colleagues.

In a detailed analysis of the Bank’s pension scheme circulated to the media on Monday, Altmann said its employer contributions exceeded 50%.

If we move to the UK economy then the latest business survey from Markit has told us this today.

The three PMI surveys collectively indicate that the economy will grow by 0.5% in the fourth quarter

Of course the economy may dip in 2017 but if it does so it will be driven by something that Andy is cavalier about in my opinion.

The projections for inflation were the highest ever published by the Bank

These were made worse by Andy’s “Sledgehammer” pushing the value of the Pound lower.

expectations of inflation have picked up, largely as a result of sterling’s depreciation.

So we have a probable scene of real wages falling due to high inflation that supposed easing has made worse. On that road monetary easing has the problems of but not the gains from a tightening of policy and reality for Andy will be for a policy error. for those hurt by it the consequences will be much worse in terms of living-standards and (un)employment.

Ooh Superman where are you now
When everything’s gone wrong somehow
The men of steel, the men of power
Are losing control by the hour. (Genesis)

 

 

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34 thoughts on “Andy Haldane of the Bank of England is lost in his own land of confusion

  1. “I would rather run the risk of taking a sledgehammer to crack a nut than taking a miniature rock hammer to tunnel my way out of prison.”
    _________________________________________
    Hi Shaun,
    1) As you rightly point out, the miniature rock hammer does indeed make slow progress, but sledgehammers do not crack nuts, they smash them to oblivion, destroying them utterly, rendering them useless.
    2) Is Andy Haldane, by attempting to justify overreaction, admitting with his analogies, that, economically speaking, he wouldn’t recognise the difference between tiny problems and huge ones?

    • Whoa! Number 2 is a very perceptive question. Brilliant!

      If problems can’t be analysed correctly then they will always remain problems because solutions can’t ever be found.

    • Hi therrawbuzzin

      Yes pretty much. He seems lost at sea to me and like his boss Mark Carney this evening wants to discuss anything other than his remit. They also ignore the impact of the QE they have voted for on inequality.

  2. I think Mark Carney cut rates after the Brexit vote because he was getting worried that he would have spent his entire 5 year tenure at the BoE and not made a single change to interest rates. He saw the opportunity, fretted that there might not be another one before his term ended, so took it.

    It’s a ridiculous suggestion but I don’t think it’s any more silly than the reasons given by Carney or Haldane or any of the other members of the committee.

  3. Hi Shaun,

    I have a business idea to sell to central bankers. Its an app called Goat entrail simulator. It will save the hundreds of these animals that central bankers seem to rely on when making forecasts. “the entrails look bad – growth is falling – must swap our pensions into gold”….

    It will be equally as wrong as the real thing but is a much more humane way of making incorrect economic forecasts. I can’t believe they do it any other way.

    Dave

    • Hi Foxy

      The problem is that the media takes a copy and paste attitude to such speeches and hyperbole these days. So the utterances of the Chief Economist of the Bank of England are mostly treated as fact when even a cursory effort at fact-checking which highlight problems.

  4. Great blog as usual. Basically:
    1. He’s never been in the real world
    2. He doesn’t get much right
    3. He’s completely insulated from his own policy decisions
    4. He’s completely insulated from Ghastly plebs like us
    That’s why Brexit was a shock. That’s why he has no idea what people will do after a Brexit vote.
    He is the epitome of why Brexit won.
    There was a marvellous similar moment on radio 4 this morning. There was the usual Islington liberal consensus and one of the panelists actually said that there wasn’t a centrist population any more and then, wonderfully added “outside London”.

  5. Hello Shaun,

    Accountability is the issue , isnt it ?

    These people need a spanking every now and then

    Carney did his best to make his prediction of inflation to come true by dropping IR , not that he needed to worry much , what with this being the UK (!)

    Forbin

    • Spanking won’t help. A private business would have performance targets, and consequences for failing (a P45 at some point). There is plenty of house price inflation, BOE salary inflation etc – it just doesn’t show up in CPI

      In short,

      They don’t know how to accurately record UK inflation.

      Head in the sand for a massive debt and house price buble.

      They don’t know where they are

      No Scooby ( clue) how to unwind the debt and get back to normal.

      By my rating, emploment performance below acceptable minimum.

    • Thank you for the link, JW. One thing that Richter didn’t mention was the high cost of health care for US military and veterans, many of whom are mentally or physically disabled due to military conflicts abroad. Former Texas congressman Ron Paul was interviewed on RT recently and he said that while more must be done to help disabled veterans, the US should also look to reducing its military footprint abroad, so it doesn’t create nearly as many veterans with huge medical needs in the future. This viewpoint is often pilloried as isolationist, but isn’t it just simple common sense?

  6. Hi Shaun, great stuff. Please keep on keeping on.

    I see Mr Carney was in Liverpool telling people it wasn’t his fault if they felt left behind, but the economy was more important. Yea gods and little fishes. As James alludes, Brexit is the result, not the cause, of all this almighty muddled thinking.

    • Hi Eric

      Yes and distributional issue are important unless they are created by the QE of the Bank of England! I did send a challenge to the BBC economics editor Kamal Ahmed and here is the exchange.

      “@bbckamal This contradicts past Bank of England research on QE which surely deserves a mention Kamal

      Kamal Ahmed ‏
      @notayesmansecon On QE Carney says borrowers have not won over savers – same message. His criticisms are on free trade and effect on jobs

      Shaun Richards ‏
      @bbckamal How can he possibly say that with Bank Rate cut ~5% to 0.25%?

      Kamal Ahmed
      @notayesmansecon because savers also tend to have assets such as houses/financial assets which have been helped by monetary stimulus

      Shaun Richards ‏
      @bbckamal That is a rather weak response. What about young savers and anyone who rents?”

      • I guess members of the 1% are classed as “Savers” by the Bank.
        Come to think of it – the entire MPC must be composed of savers; Carney will be telling us next that savers have done better than borrowers out of emergency base rates and QE.

        I despair.

  7. Great blog as always, Shaun. Thanks for bringing Andy Haldane’s speech to your readers’ attention.
    Sorry, I never heard of Redcar, but apparently it is in Yorkshire in the North East. A lot of Haldane’s speech related to regional differences in growth rates. Chart 15 is labelled “Growth in average weekly pay (2008 to 2016)”. It relates to increases in nominal weekly earnings, not weekly earnings in constant pounds. Any such calculation would almost certainly tend to hurt London’s pay performance more than the NorthEast’s, using a proper deflator, if only because housing prices have risen so much faster in London (67.9% from July 2008 to July 2016) than in the NorthEast (-4.2%). Unfortunately there are no regional temporal consumer price series for the UK. The appropriate deflators for these weekly earnings would be regional RPIJ series; regional CPI or CPIH series that excluded housing prices would be dysfunctional.
    This can be seen if one looks at the relative regional consumer price levels (RRCPLs) calculated in 2004 for the UK by Duncan Wingfield et al. These were unfortunately the last RRCPLs calculated with owner-occupied housing (OOH) components found in the RPI classification, which included mortgage interest, housing depreciation and council tax. This made a big difference: the spatial price index number for London, the most expensive region, was 109.7, with UK=100, while the North East and Yorkshire and Humberside were tied for the second cheapest region (Wales was cheapest) at 94.2. However, if one removed mortgage interest, housing depreciation and council tax from the comparison, London, the North East and Yorkshire and Humberside would stand at 107.1, 96.1 and 95.9 respectively. The 2010 RRCPLs were calculated based on the CPI classification and exclude OOH costs. Unsurprisingly, they also show a smaller divergence among regions than the 2004 estimates based on the RPI classification: London, the North East and Yorkshire and Humberside stand at 107.9, 98.2 and 97.0 respectively.
    In a country like the UK regional consumer price series, whether spatial or temporal, that exclude house prices, simply aren’t useful. However, based on the 2016 annual report of the advisory committees, it seems that there are no plans to change the classification of the 2016 RRCPL. The feasibility of calculating regional CPIs is being looked into but there are no plans to calculate regional RPIJs (in fact, the national RPIJ is going to be discontinued after the January 2016 update).

    • Hi Andrew

      Thanks for the thoughts on regional price inflation. I have been trying to think if Paul Johnson made any recommendations on this without looking it up! I however could not resist looking at the 2010 version which is something of a gem. They did it effectively for Eurostat which was kind of odd as the UK should be at least as interested as Europe in the results.

      But the real gem is that the housing sector was excluded in its entirety as there is this on the rental sector.
      “Although housing services are part of individual consumption expenditure by households, they have been excluded from the RRCPLs. This is because it is very difficult to measure and collect regional prices for property rents on a like for like comparison for a set of properties. Rather than assume no regional price variation, property rents have been excluded from the RRCPLs. ”

      In other words it is not far off meaningless.

  8. Shaun, a lot group think and self congratulatory back slapping going on in this forum so I’ll break the mould, you say “…the EU leave vote was along the lines of the end of the (economic) world as he knew it.” Well, it is, isn’t it? We don’t know:

    1. what trade agreement we will have with either the EU or the,I believe, 60 odd other countries we currently enjoy free trade with via EU membership.
    2. Which EU legislation will be repealed (consumer rights? employee rights – anyone up for working an 80 hour week?)
    3.What new trade, business and employment legislation may be passed for better or worse
    4. What will happen to EIA funded UK enterprises or other research awarded EU grants
    5. How economic immigration AND emigration will be affected and the likely ongoing impact on (un)employment and skills shortages/gluts in the UK and wage rates.

    The list goes on an on. How can it not be the end of the economic world as we know it as you imply?

    I think even Brexiteers will tell you it is the end and that that end of the “old economics world” is a positive indicator for a better future for the UK.

    I am not defending Andy Haldane, the man is a fool but equally, I cannot share your view that the result of the referendum has done anything other than thrown us (albeit slowly and maybe not at all following the High Court ruling pending the Government’s appeal) into a Brave New Economics World where most things are unknown. .

    • Hi Jive Bunny

      Let us put to one side Brexit. The credit crunch era has brought lots of changes meaning that we have been facing a world which was if not unknown mostly unfamiliar and different. That seems set to continue with yesterday’s result in Italy and President-Elect Trump.

      But if we move to the point at issue which is monetary policy my point is simple and applies to the vast majority of views on the economic future of the UK. The fall in the UK Pound meant that we had a stimulus equivalent to a 2% Bank Rate cut post the vote when Andy Haldane pressed the button saying yes to his “Sledgehammer”. That was a mistake on your view of the future in my opinion as the main danger for 2017 is inflation.

      As the Rolling Stones put it “You can’t always get what you want”……Some humility from central bankers would be welcome especially as there is a fair bit for them to be humble about.

      • Yes Shaun completely agree but your original post clearly linked Brexit with the end of the World as Andy Haldane’s June speech was in response to the referendum result which you made no attempt until now to differentiate between Brexit changes and mistaken monetary policy changes, hence my comment

    • Well Jive Bunny, 4 years of QE preceded the recent referendum. QE has not been used since the Napoleonic wars and was and viewed as very very dangerous monetary experiment. You cannot deny that an asset bubble has resulted, not quite in comparison with the tulip bulb mania but at least comparable. All of that happened before the foolish referendum, which has itself not actually crystallised into anything at all yet

      A focus on the Brexit Vote rather misses what came before but I guess we can now blame everything on Blighties idiotic and self-imposed polling event,…. even Trump?

      Paul

      • It was Andy Haldane and Shaun who took the initiative and were focusing on Brexit, not me. I simply joined the party to bring some sense to the situation that all bad things cannot be blamed on anything other than Brexit. Brexit has it’s fair share of blame to shoulder along with stupid rate cuts, QE, Funding for lending, Help to Buy and last but by no means least bank bailouts. .

        In fact I would say the UK entered uncharted territory in 2008/9 when mostly unwarranted rate cuts, bank bailouts and QE big time started. As you say and I allude to in my post the referendum result may not throw us anywhere/crystallise into anything pending the appeal court decision, but one thing it has already done is created immense uncertainty leading to a flight of capital with the resultant sterling collapse which will now provide us with an extra push of inflation on top of pre existing services and money supply inflation as 2017 develops . I completely disagree that everything can be blamed on Brexit just as everything cannot be blamed on anything other than Brexit.

        Thanks for the don’t like mark by the way if it was you, now I know I’m on the right track.

        • Please don’t mark my posts up whoever you are as it makes me nervous that I’m failing to think independently and falling in line with the sheep

      • Unknown may be worse than vile, then again it may be much better but unknown is much worse than vile or better because the not knowing that allows people’s imaginations to run amok.

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