“A week is a long time in politics,” Harold Wilson once said. Never have these words rang more true. This was surely a contender for the most eventful week in the UK’s peacetime history.
I’m pleased we have a new Prime Minister. Last weekend, the Tory leadership contest looked like extending to September – a delay avoided after Andrea Leadsom conceded. August can be a wicked month on financial markets and, given systemic strains across the Eurozone, and jitters on UK markets too, next month could be turbulent.
Such dangers, plus a general post-referendum unease among voters, meant this was no time for the UK to spend almost two months without a leader. British politics remains febrile – not least given the disgraceful mess that is Her Majesty’s Opposition – and will remain so for some time. But at least we now have a government.
I’m happy, also, that Theresa May brought several leading Brexiteers into her cabinet, including those who’ll oversee the arduous task of extracting the UK from its 43-year membership of the European Union – but more of that later.
Because I want to focus initially on the other big policy news from last week – the decision by the Bank of England’s monetary policy committee, very much against expectations, not to cut interest rates. On balance I think that’s a good thing. Rates are already at rock-bottom – having been kept at 0.5pc since March 2009, the lowest since the Bank was founded in 1694. Ever since the EU referendum on 23rd June, though, Bank Governor Mark Carney has dropped hints rates could go lower still, falling to 0.25pc and then even 0pc.
Prior to the referendum, financial analysts were fixated on when rates would rise – with money markets pointing to the first increase in 2018. Since we voted to Brexit, and given what Carney has said, rates are now firmly expected to fall, not returning to 0.5pc until mid-2020.
Given that the MPC didn’t cut rates last week, there’s now a near-consensus among City economists the committee will do so during their August meeting. There are also widespread expectations the Bank will soon launch yet more quantitative easing.
I know “most economists” think another bout of monetary loosening is a great idea. I have to say, though, that lowering interest rates further, and “printing” even more virtual QE money, strikes me as nuts.
Why do “most economists” back ever more monetary stimulation? Because it will bring a short-term boost to stock and bond prices – pleasing the big City institutions and also the government, which can then borrow even more cheaply. There are few economists with the independence of mind to suggest such an outcome is anything other than fantastic, or to point to, or even think about, the long-term consequences.
Once the sugar rush fades, all QE does is make the bond bubble even bigger, and put shares prices at even higher and increasingly unjustified valuations. We’ve had massive monetary stimulation for seven years, after all, yet the weakest economic recovery in our history. And when the Indian rope trick which is a QE-bolstered market finally collapses, as it must, the scale of the drop, and the related economic fall-out, is even greater.
I’ve lost count of the conversations I have had with eminent, well-informed people – leading investors, captains of industry, cabinet ministers past and present – in which we talk honestly and openly about how QE might end, with both of us failing to provide an answer. Yet, still, we extend and pretend, thinking it will all be OK, as “most economists” egg us on.
Yes, it was right to use “extraordinary measures” to calm the post-Lehman turmoil. Without emergency liquidity during the dark days of 2009, we’d have seen a succession of shattering bank failures. But, since then, rates have remained nailed to the floor and QE has kept expanding – with central bank balance sheets soaring from around 5pc to well over 20pc of GDP in the UK, US and Eurozone. Having initially announced £50bn of QE in 2009, the Bank of England has churned out £375bn of additional money – and counting.
I accept Brexit has caused economic uncertainty. I also accept some investment decisions may now be delayed, and the UK could grow a bit slower for a while. But I don’t agree, not by a long chalk, with media-friendly economists, based at investment banks no doubt well-positioned to reap short-term profits from more QE, that recession is inevitable. Industrial production just enjoyed its strongest quarter for six years. Unemployment is at a seven-year low.
I’m not denying recession danger. And I’m not saying some of the 1.6m British people unfortunately out of work wouldn’t benefit from a slightly sunnier short-term economic outlook. But are we now to implement “extraordinary monetary measures” every time there’s even a chance of recession? Are rates to go entirely negative? Are we going to let rip, avoiding even the pretense of fiscal restraint, despite government debt doubling to £1,6000bn under the outgoing Chancellor – and still rising by more than £10bn a month?
How far are we going to push these mega-stimulation measures until we accept the lessons of history – that they are ultimately likely to prove extremely counter-productive? When is someone going to think of a timeframe extending further than a single month and wean the UK and the rest of the Western world off the economic steroids?
I’m extremely concerned about QE in particular – not least as we’re on course to pursue it way beyond even today’s extremes. Since the credit crunch, central bankers have allowed markets to become addicted to such measures. Mainstream stocks and bonds have begun to resemble ponzi schemes, held up largely by the prospect of more QE. And now Prime Minister Shinzo Abe has just won a landslide election victory in Japan’s upper house, he’ll continue with “Abenomics” – money printing on a quite extraordinary scale, taking the Bank of Japan’s balance sheet above a jaw-dropping 70pc of GDP. This will depreciate the yen, handing Japanese exporters a competitive boost. Other major nations will no doubt respond, as the “currency wars” rumble on.
Despite sounding pessimistic, though, I’m genuinely upbeat when it comes to the UK leaving the EU. While May backed Remain, when she says “Brexit means Brexit” I believe her. By bringing in leading Leavers to grapple with the EU over the precise terms, she’s sensibly letting others shoulder the blame when negotiations inevitably stall. In appointing Former Europe Minister and one-time Tory leadership contender David Davis as Secretary of State for Brexit, though, May is showing that Britain means business.
EU rules, we’re often told, state the UK must accept “free movement of people” to stay in the single market. I don’t accept that. Such rules will crumble if politics dictate they must. Eurozone members are supposed to keep their budget deficit below 2pc of GDP, but they don’t. The Maastricht Treaty’s “no-bail-out” clause has long been ignored, even since the Eurozone began to implode.
With electorates restless across the EU, and countless tens of millions backing Britain in our quest for a looser, more democratic Europe, the UK holds powerful cards.
“Given a fair wind, we will negotiate … head held high, not crawling,” said Wilson back in 1975, of the UK’s entry into the Common Market. Prime Minister May should heed her predecessor’s words as she leads the UK away from the over-extended mess that the EU has become.