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22 June 2016

Campaigning Shame - and the Bank of England



With the UK’s EU referendum now upon us, I had toyed with the idea of addressing the issue in this column, and indeed I had discussed with some of the other contributors how we might present our views (one thing you may be sure of, there is no unanimity in favour of one side or the other). However, the more I think of it, the more I have to say that my over-riding sense of the whole campaign - from the headline figures on both sides - has been the relentless negativity and frankly ghastly vitriolic personal attacks. We’ve been told to expect world war three and the end of western political civilisation; the Turkish hordes at at the gates and a wave of ‘different’ humanity are poised to drown us. Whichever side you’re on, the other lot are going to trash the economy; likewise, for both, the others are going to destroy healthcare as we know it. It’s utterly bizarre to see and hear supposedly intelligent people wallowing in the gutter shrieking abuse and seriously expecting to attract positive votes; it’s a finely balanced contest - and an important one - and effectively each side suggesting that half the population are irresponsible or stupid is a strange approach to campaigning. But the new low in British politics (and I say that, fully aware of how bad it used to be, with restricted franchise, rotten boroughs and honours for sale - although some would argue that that bit hasn’t gone away), a trough so vile that I’m not sure how they will extricate themselves with reputations anywhere near intact, has been the exploitation of a murder for political advantage. That’s why I’m not going to devote this page today to the referendum, and instead we have an economic piece by Richard Horswill looking at some of the policy decisions taken in recent times by central banks. And to make it clear, I do know that there are some honourable exceptions to what I have said about this campaign; I don’t need to list them - they are clear. Sadly, though, they appear to be in the minority, while many of those who not so long ago aligned themselves with the ‘new, kinder politics’ have dived headfirst into the slurry pit. They would all do well to remember that if you sow the wind, you will reap the whirlwind.



An Open Letter


This is an open letter to Mark Carney, Governor of the Bank of England, from Richard Horswill. All views, opinions and conclusions are strictly his own.


Dear Mr Carney,


I have decided to put pen to paper today as I believe that the monetary economic policies that you have operated (continuing those of your predecessor Sir Mervyn  - now Lord - King) since the 2008 financial crisis, and alongside your major counterparts in the US, the EU and Japan, are suicidal for not just the UK but the global economy as a whole.


As a group of economic leaders you have been creating massive financial bubbles in stocks, bonds and property (those are just the major areas) by injecting monetary stimulus in the form of unearned free money to a predatory banking system, rather than the real economy.


On the basis of PE ratios, equity markets have performed too well since the crash of 2008 mainly due to the search for yield as zero interest rate policies have taken hold. It has become increasingly evident that stock markets only perform because of the continuing promise of cheap money. It is also evident that significant support has come from stock buy-backs which create a false valuation. Such buy-backs come at the expense of reinvestment which will undoubtedly become apparent in the years to come as innovation and investment in people and plant are materially diminished.


Sovereign debts (bonds) have, through central bank policy (QE), been forced unnaturally higher to collapse yields in order to lower debt servicing costs. It appears that we are not too far away from the need for further cash injections as deflationary forces predominate. Also, with Brexit a real possibility, UK debt may well become unpopular for a short time, leading potentially to higher yields and thus putting the burden back on the treasury to try and balance its books. The greater the  stresses in the UK debt markets, the more chance that further QE will be a necessity.


Property in the UK tells its own story as valuations are particularly outrageous in London but as a whole are generally out of sync in a historical context. Compared with average wages, a seven to eight times ratio is extreme. It is obvious that this bubble is being propped up by low rates, but with insane government aid attempting to put a floor in the market by offering 20% discounts alongside 95% mortgages we are brewing up a negative equity potion that could crush many households in the event of a spike in interest rates.


The policies since 2008 have been solely developed to postpone the deleveraging process. However, the unintended consequences of  central bankers’ actions have led to mal-investment with cheap money purely focused on speculative activities. As a consequence markets have lost their rational price discovery mechanism.


You have also maintained a financial war against savers. Financial repression is a form of theft. Your mandatory 2% inflation target is designed to reduce the overall debt burden at the expense of savers; however you are even failing at that.


You and your cronies have bastardised the free market mechanisms creating massive inequality. Sitting in your ivory tower, you clearly have no concept of morality or ethics. The neo-proletariat are being squeezed from every angle by an elitist agenda favouring the status quo for personal gain. The greater good is seen as irrelevant. Your failures are clear and the history books will document them in due course.


Yours sincerely,


Richard Horswill.


PS. Please pass this on to Janet, Mario and Haruhiko - but also to Ben and Alan.


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