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
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)