Good start Mr Carney – but we’re still in a mess

Mark Carney seemed to give a convincing account of himself at the Commons Select Committee last week. The soon-to-be Governor of the Bank of England presented UK Parliamentarians with an economic tour-de-force, while pressing the right political buttons too.

In a hearing that attracted intense media scrutiny, Carney’s repeatedly committed himself to a “flexible inflation-targeting framework”. In other words, while the Bank of England’s 2pc inflation goal will remain central to its policy-making process after he takes the reins in July, there is scope for lengthening the period during which that target should be reached.

To some ears, that amounts to “more of the same”. After all, despite the UK economy dipping in and out of recession in recent years, the Bank has now overshot its inflation target for 37 months in a row. Even during Carney’s testimony, the Monetary Policy Committee announced that the bank rate will stay at 0.5pc, as it has been since March 2009. This is despite the fact that, in the MPC’s words, “CPI inflation is likely to rise further in the near term and may remain above the 2pc target for the next two years”. So the existing two-year policy horizon has already been de facto extended.

The likelihood is, though, that under Carney our commitment to fighting inflation will become even more “flexible”. As such, he confirmed he has already conducted “high level” discussions with Chancellor George Osborne about changing the Bank’s remit. Keeping inflation close to 2pc, then, is set to become even less of a policy priority. That’s useful for debtors, not least the British government, as it lowers the real value of what is owed. High inflation is disastrous for the low-paid, though, as it erodes living standards, and also for savers too.

Mindful of such concerns, Carney was keen to dampen speculation that he wants a US-style “dual-mandate” to target both employment and inflation. Last December, the Federal Reserve went further, indicating the US base rate would remain close to zero until unemployment fell to 6.5pc, implicitly giving priority to real economic growth over price stability within the dual-mandate.

Carney argued against such an approach in the UK, stating that he also “saw the downsides” of a “nominal GDP” target, a variation on the Fed’s latest pro-growth move, revealing that he was “far from convinced of its merits”. This was at odds with his recent statements at Davos and elsewhere, which invited speculation that UK GDP-targeting could well be on the cards.

The incoming Governor also dismissed calls by Lord Turner, Chairman of the Financial Services Authority, that policymakers should consider using “helicopter money” to finance government deficits, avoiding even the pretense that the hundreds of billions of pounds of UK sovereign debt the Bank has been buying since 2009, with money created ex nihilo, will someday, somehow be paid back.

The slaying of such radical policy dragons reassured many committee members. To the same end, Carney showed “emotional intelligence” too. Perhaps inviting a contrast between himself and incumbent Sir Mervyn King, he emphasized the importance of “effective communication” between the Bank, lawmakers and the markets. Avoiding a “matey” tone, he treated MPs with a respect that ministers and other “high-ups” often don’t.

Attempting to place himself above politics, Carney committed to serving for five years as Governor, and five years only, saying this decision was partly driven by the need to move back to Canada in time to accommodate his daughters’ schooling needs. These are the actions not of a technocrat, but of a modern, sassy decision-maker who is well-used to being in the public eye and of the need to appeal to a broad audience.

In sum, Carney not only got through a marathon grilling unscathed, but appeared to win-over more skeptical MPs. This doesn’t surprise me. While I haven’t seen much of him in recent years, I’ve known this charming 47-year old Canadian since the early 1990s – when we were both studying for an advanced economics degree at Oxford. Even then, among a ridiculously high-powered year-group, he stood out as one of those rare characters who combines a first-rate intellect with excellent “people skills” too. It was clear that Mark Carney – super-smart, a superb ice hockey player and great company too – was heading for the top. And no-one begrudged him that.

I can’t helping feeling, though, that when it comes to nominal GDP targets and “helicopter money”, the prospect of extremely radical measures is being raised here in the UK – by Carney and others – in order that he can then quash such prospects, in a bid to present as more reasonable policies that are already very, very radical indeed.

As such, while Carney skillfully downplayed “quantitative easing” during this hearing, he did state that “while I don’t start from a position of looking for a dual mandate, I do start from a position of considerable monetary stimulus to take up the slack”.

Since March 2009, the Bank has enacted £375bn of QE, most of it used to buy gilts, a policy that has been hugely controversial, not only because it risks inflation and currency wars but because it’s driven down annuity rates which dictate how much a newly-retired person receives from their pension.

“I absolutely recognize there are consequences from QE,” Carney told MPs. “Pensioners in this country are in difficult circumstances. But the responsibility of the Bank is the broad economy”. While this is smart politics, can it possibly be smart economics to keep pursuing a policy that has already seen the Bank of England expand its balance sheet by 350pc over the last four years?

It’s strikes me, in fact, that we’re courting disaster. With the price of gold up three-fold since QE began, it would appear I’m far from alone. It is now hard for rational observers to avoid the conclusion that the Western world is pursing a policy of deliberate inflation-stoking and currency debasement, as the easiest way to get our massive liabilities under control and competing with the fast-growing economies of the east.

Irrespective of who heads the Bank of England, ultra-loose monetary policy in the UK will persist for some time to come because, ultimately, it is what our political leaders want. Western central bankers don’t get appointed these days unless they are willing to play that game.

The government thinks money-printing is the right course and, with share prices high on the on-going sugar rush, they see little reason to change their minds. Yet Osborne himself was correct when, in January 2009, he stated that “in the end printing money risks losing control of inflation and all the economic problems that high inflation brings”. He was right when, the following month, he demanded then Chancellor Alistair Darling seek approval from parliament before embarking on the “risky” process of “quantitative easing”.

In the autumn of 2009, Osborne said that when QE ends, “we will we will start to discover the true market appetite for UK government debt”. True, true, true. But £375bn later, this market appetite has actually diminished, with sterling-denominated debt now not only at its price peak but in danger of currency debasement too.
As David Cameron himself said of QE in late 2009, “Sometime soon it will have to stop, because in the end, printing money leads to inflation”. Isn’t 2013 soon enough, Prime Minister? For if this policy goes badly wrong, future historians won’t be blaming Mark Carney.

ENDS