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Showing posts from October, 2016

The dangerous scheming of stupid politicians

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There is growing speculation that the Governor of the Bank of England, Mark Carney, will not extend his term. Carney originally agreed to a five-year term, which would end in 2018, but it had been thought he might extend to the more usual eight years for a Bank of England governor. This is now looking increasingly unlikely.

Carney has come under fire from pro-Brexit politicians for warning that Brexit is likely to increase inflation and unemployment and reduce economic growth. They accuse him of "talking down" the UK. This is some chutzpah, from politicians whose incompetence and arrogance has stunned the world. If anyone is "talking down" the UK, it is the Three Clowns currently running the Brexit project, and their baying packs of supporters.

I have been severely critical of Bank of England policies. I don't like the over-reliance on QE: I think it is a useful crisis tool, but far too much has been expected of it. I think that the independence of the Bank of…

Raising interest rates is not that simple, Lord Hague

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The present period of very low interest rates is widely assumed to be temporary, a consequence of the 2008 financial crisis and subsequent central bank action. Because of this, as the financial crisis fades into the mists of time, there is growing political pressure for "normalisation" of interest rates. Here, for example, is William Hague warning that central banks must start to raise rates or face losing their independence:
The only way out is for the US Fed to summon the courage to lead the way to higher interest rates, and others to follow slowly but surely. If they fail to do so, the era of their much-vaunted independence will come, possibly quite dramatically, to its end. Hague gives ten reasons why low interest rates are a bad idea. His points can be summarised thus:


the "reach for yield" by savers who want higher returns drives up the price of assetshigher asset prices increase wealth inequality, fuelling popular angerpension funds are struggling, forcing…

State pensions: property right or benefit?

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I know that lots of you are heartily sick of the WASPI campaign, but it does have a tendency to throw up interesting issues. This time, it is the legal status of the UK's state pension.

A couple of days ago, the WASPI campaign announced a crowdfunding campaign to raise funds for legal action against the Government. Their CrowdJustice page says that legal action would potentially be twofold:


(this is a screen print from the CrowdJustice page. Regular readers of my blog will be aware that I do not post direct links to WASPI campaign material.)

Personally, I am of the opinion that judicial review of the legality of the state pension age changes in the 1995 and 2011 Pension Acts is a non-starter. The timetables for the changes are built into the Acts themselves, so any successful challenge to them would require repeal or amendment of one or both Acts. Since the UK has no written constitution and Parliament is sovereign, judicial review cannot be used to challenge primary legislation u…

The dominance of Brexit

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Some people have been saying that sterling's fall has nothing to do with the Brexit vote. Sterling was already falling before the vote, they say, because of the UK's wide and growing current account deficit. So I thought I would fact check this.

Here is the UK's current account deficit since 1987, courtesy of ONS:


Well, ok, it has rarely been anywhere near balance in the current century, and it has been trending downwards since 2011.

Now let's look at sterling. Here is sterling's trade-weighted exchange rate since 1992, courtesy of the Bank of England (via this House of Commons briefing paper):


Umm. The correlation between the current account deficit and the trade-weighted value of sterling appears to be negative. Sterling has been rising since 2011 - until this year.

This is actually reasonable. The trade-weighted value of a currency reflects the external performance of the economy. And for a long time now, current account deficits have not been regarded as import…

The currency effects of Brexit

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Sterling is falling. Predictably, the financial press describe its slide as a "pounding" and gleefully tell us that sterling is the worst-performing currency after the Argentinian peso.

But some people are cheering. Falling sterling is good for exports, isn't it? So if the pound keeps falling, the UK's large trade deficit will start to shrink, reducing the UK's dependence on external financing and hence its vulnerability to a "sudden stop".

Sadly, it's not that simple. Falling sterling is not an unalloyed good for exporters. The real effect is considerably more nuanced, and over the longer term, not necessarily positive.

As an exporter myself, I am certainly enjoying the pound's fall. These days, most of my income is in US dollars. This is how GBRUSD has performed this year:


Since my income is in dollars but my outgoings are in sterling, I've had a pretty substantial pay rise.

But my chickens will come home to roost shortly. The price of pet…

Why is global trade so weak?

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Global trade is awful. Really, it is. For the last five years, trade volumes have been growing at their slowest sustained rate since the early 1980s. Here's a horrible chart from the World Trade Organisation's latest forecast:

And in the last year, things have got worse:
Import demand of developing economies fell 3.2% in Q1 before staging a partial recovery of 1.5% in Q2.  Meanwhile, developed economies recorded positive import growth of 0.8% in Q1 and negative growth of -0.8% in Q2.  Overall, world imports stagnated in the first half of 2016, falling 1.0% in Q1 and rising 0.2% in Q2.  This translated into weak demand for exports of both developed and developing economies.  For the year-to-date, world trade has been essentially flat, with the average of exports and imports in Q1 and Q2 declining 0.3% relative to last year. Oh great. The WTO's chart shows that flat trade eventually translates into flat growth. And as this chart from the World Bank shows, growth is indeed fl…