I am writing this having already been on BBC 5 Live this morning at 5.20am and knowing that by 6.15 I will be repeating the performance on BBC Radio 4's Today programme.
On both occasions I am up against a bond trader, and on Radio 4 against a banker. The BBC assumption is that bond traders rule the world, and that they must be appeased come what may.
I disagree, of course. Whilst I know that Truss and Kwarteng made a total mess of their mini budget, failing to deliver the data to support their assumptions, which is what left the market in confusion, the reason why we have a crisis is not entirely down to them or interest rates would now have fallen below 2% again, as they were in the summer, and they have not. They are around 3.6% on government bonds this morning. Their big mistake was in not understanding how the Bank of England was undermining them.
It is the Bank of England that is trashing the UK economy right now. It is putting up interest rates to copy the US Federal Reserve. It will do so again next week. And it is planning to sell £80 billion of the government bonds that it owns as a result of the quantitative easing programme over coming months to again force up interest rates by demanding maximum cash from the financial markets. Letting the Bank of England pursue this agenda was Truss and Kwarteng's big error.
The combined mistake the Bank, markets and Truss made was in believing that interest rate increases are required to stop inflation caused by events external to the UK. It cannot and will not. Interest rates here have no impact at all on increasing gas and imported food prices. The Bank of England have their policy wrong.
Their second mistake was in accepting that inflation is an ongoing issue. It is not. Inflation is calculated as a comparison of price levels one year with price levels the previous year. It does not measure absolute prices. It measures relative prices. So, this year prices are high compared with those before Putin's war. But by next April the comparison will be between prices that are high because of Putin's war and prices also high because of Putin's war. So inflation will fall, significantly. That will not be because of rising interest rates. It will be because that's the way the maths works. There is nothing more to it than that. In that case we simply do not need interest rate rises.
Nor, most particularly, do we need the Bank of England to reverse QE right now by selling £80 billion of bonds. If there is capacity within markets to buy bonds - and the Bank obviously thinks that there is - then the need is to sell government bonds to keep funding for education, the NHS, defence and benefits going (all the rest is incidental compared to them).
In summary, we do not need rate rises to tackle inflation and we do not need to reduce the size of the Bank of England balance sheet. The Bank has almost all its policy wrong. Instead, what we do need to do is reduce the threat that children might go hungry, people might not have roofs over their heads, businesses will collapse and people will be unemployed. That is the priority.
So, what must the government do? It must tell the Bank of England to slow and then stop interest rate rises, before reversing them, which programme has to start now.
It must also tell the bank to stop selling its bonds, which it is completely entitled to do since they will be sold at a loss and the Treasury has to underwrite that loss and so has the ability to stop it happening.
And then the government has to borrow more to cover the cost of the commitments to the people of this country to supply decent public services that it must honour if we are to avoid recession.
And that borrowing the government has to make will, if my plan is followed, only be a substitute for the bond sales that the Bank of England is planning to make, so we know that the markets think the capacity to buy bonds to that amount exists.
This plan completely fills the so-called black hole in government funding and simultaneously keeps the public services intact.
I would actually go further and use QE to cover the cost of the energy crisis, providing extra funds as as result for additional investment programmes to provide the economy and sustainability with the boost that they need, but I will not have time to address that on air.
My key point is simple. It is that we do not need austerity now: we need more government spending instead.
PS Having now done the interviews that, I think, is the message I very clearly got across.
PPS The interviews can be heard again on the BBC Sounds app. Radio 5 was 5.20 and Radio 4 6.15
PPPS Now to take a snooze before restarting the day.
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I’ll listen back later today. I did “Wake Up To Money” once – when the Compass “Plan B” report came out in 2011 – and my thought was “who’s listening to this at 5.20 am?” In general the BBC should strictly ration appearances by the financial sector – they get far too much coverage, at the expense of public sector, civil society, trade union, academic and business voices.
Richard,
I’ve learnt so much from you and others over the past few years regards government finances and how it all really works.
You said the borrowing required for public services could substitute the planned bond sales. Aren’t the 80bln in bond sales also just borrowing and government free to spend that into the economy in anyway they see fit?
It could
But quite specifically it won’t
It is about debt reduction
I was surprised that you didn’t refer to the mini budget tax cuts in this interview as one of the factors which provoked the critical market reaction. The news programmes appeared to emphasise on the idea that borrowing to enable tax cuts was a bad idea. ?
There is a tint time available. And the emphasis was on what to do now
Morning Richard
Listened sleepily to Radio4 . Since they no longer publish their online ‘running order’ ( Sara Sands ‘reform’ ?) i can’t see which was which of the other two, but one certainly agreed pretty closely with you .
You might later point that out
Rest well ! D
I was surprised
Bill Blain clearly close to my position
I had never heard of Bill Blain -probably because I don’t follow the markets.
So I looked at his Morning Porridge. He also uses a term I do ‘Cruella Braverman’ and seems to be a Southampton F C supporter.
I saw this “the Tories .. are now locked into an equally suicidal fiscal orthodoxy – Austerity.”
With Lord Bilimoria of the CBI making a similar point last night, perhaps the tide is turning , as yet unnoticed and we shall soon see the early signs of the change of direction. I look to hope.
I heard a ‘Richard’ spoken about today on R4 as I caught it at 06:30 on the way into work. ‘Sorry I missed you – I nodded off again after my alarm went off.
The bloke I heard talking said that inflation was here to stay in the long run – obviously you had said your bit and he was having his moment in the sun. The whole thing sounded confused to me and inconclusive – I wonder if the BBC will keep the debate going throughout the day or orthodoxy will gradually creep in.
I fully support your stance above.
But the BoE governor should have been sacked by Truss in my view.
That is one of her mistakes you don’t hear too much about. The BoE with its un-elected officials always gets off too easily in these matters.
BTW – well done you! I don’t know where I am usually at 05:20 in the morning – I’m putting myself back together piece by piece if I wake at that hour.
Fully awake again now: 8.10.
But I can always wake up instantly, thankfully
Typo para8 “The bank has little all its policy wrong”.
Thanks
Edited
Great to see you getting some mainstream coverage!
I didn’t understand the point Bill Blain made re Chinese Manufacturing. Is it a red herring ?
Not entirely
He is saying we will have higher inflation
Ok, let’s work out how to live with it then without destroying our economy to do so
“Ok, let’s work out how to live with it then without destroying our economy to do so”
I heard that schools will have to cut staff and make class sizes bigger because current funding will not cover costs. This is like cutting off your legs to save weight in order to run faster. Children are our most important investment for our future not just morally but economically.
Also, as you say the current inflation is mostly due to external factors that interest rates here will not resolve, and indeed in themselves make life more costly for most people. The BoE has an idiot in charge. It’s beyond me.
September’s CPI figure of 10.1% will certainly exceed, as you rightly point out, the average inflation figure to September 2023. Under the triple lock, pensioners and claimants will benefit to the detriment of wage-earners. But the economy, and the Treasury in particular, loses also if it remains a simple numbers game. Which is essentially is.
If the benchmark figure was to become the September figure plus or minus an annual inflation indicator predicted by the OBR, IFS or BOE (as politically agreed), we might arrive at a more accurate figure. If the indicator shows that inflation will go down, and it does, then the Government will save, initially and subsequently, on benefit payments throughout the year.
Recipients of state funding may lose out initially but will recoup as the year progresses. If the government funded the triple lock, for example, in this way at (say) an 8% inflation indicator for 2022/23, it would immediately save between four and £5 billion. Pensioners and other claimants would not materially suffer over the year.
If the inflation indicator became incorrect, as a result of circumstances beyond any predictable control, and the annual inflation rate rose to 10.5%, for example, the government would simply ‘owe’ the entitlement. At an 8% prediction, pensions and benefits would increase by an additional 2.5% above the settlement figure the following year.
This would be a massive incentive for the number crunchers to get their figures right as it builds in top-up payments later if they get it wrong but saves money instantly if they get it right. If they predict inflation at too high a level they incur expenses at a higher level immediately. So it is in their interest to get it as right as possible to save money now and not be subject to top up payments later. The tendency would be to constantly underestimate the figure, to both save money straight away and pay back later when it is worth less. The checks and balances here would be there would have to be some penalty if the government got the inflation indicator lower than the final result by more than (say) 1%. It might be (for example) that each percentage point underestimated would be doubled in the pay back the following year.
If the assessment is too high, and inflation is only 5%, the claimants would keep the difference. They have already received it and there would be no hope of getting it back except by reducing the payments the following year. That would be for each budget to decide.
This system could be fine-tuned. Unfortunately a lot of (probably most) people wouldn’t really understand it and there would be disputes about entitlements and payments. It would be temporary or only applicable when inflation was above, for example, 5%. There are advantages to keeping it simple. Perhaps this system could run for a period of (say) five years, or whatever the government feels appropriate, and then a simple system reinstated when inflation is back towards the 2% level. But it saves a lot of money at a time when there is no low-lying fruitto pick. Especially when inflation does finally fall, as payments will reflect the inflation rate of the previous September, and not those later in the year as it declines.
Interesting, but I fear far too complicated for use
I think the complicated proposal completely ignores the point that people whose income is controlled by government – benefit claimants and pensioners in particular will already have had to find the money to pay the inflationary increases that have happened between the previous increase and the current one. The rate paid from April 2022 did not take into acount the huge cost of living increases that have happened from October 2021 to September 2022.
It also ignores the fact that the baseling is set far too low and leaves all trying to survive on benefits and pensions in poverty. Any proposal that saves money from benefits/pensions, by definition, takes it from those least able to afford it.
I couldn’t access the Radio 5 discussion (6am earliest I could access), but I enjoyed Radio 4. I was interested to see the criticism of you position that I expected was quite muted. Bill blain was the interesting one, from the bond market; so I read his latest Blog; which is highly critical of Sunak, as now trapped by the mess Truss created (and I think, as the Braverman scandal unfolds that is true not just economically, or in financial markets, who are clealry just not that impressed, but politically). I can summarise the Blain thesis on Sunak in one Blog phrase: “the Tories …. are now locked into an equally suicidal fiscal orthodoxy – Austerity”; that from an experienced bond market strategist.
You are pushing against a half-open door Richard. If the door is still hard to open fully, I think that may be because the prostrate body of the Conservative Party is now jammed behind it.
I sensed sense on his part
“reduce the threat that children might go hungry, people might not have roofs over their heads, businesses will collapse and people will be unemployed.”
One would have to be insane not to agree.
Adding some facts (or as the banker trash would call it “colour”) – NHS hospitals are now opening food banks …. for their workers. Details here:
https://www.thecanary.co/uk/analysis/2022/10/26/nhs-staff-are-so-poor-hospitals-are-opening-foodbanks/?__s=eqgpuxnzue7ybtgmjch1
The tories talk about “helping the “vulnerable” – whatever that means – without specifing the people or the help.
Well we appear to have one definition – people in work, at the NHS, who can’t afford to feed themselves.
Back in 2016 a London cabbie observed to me that working people were being admitted to A&E because they had collapsed at work – it was found they (mostly women) were suffering from malnutrition). The hideous problem now seems to have been normalised & now starvation (or the threat) has moved up the “food chain” to workers in the NHS.
The new Prime Mincer will make no difference, it will be the same old tory smoke and mirrors – but when you have no empathy/I’m alright Jack – what else is there?
(Natch there are no food banks at private hospitals where the tories go).
The government definition of the most vulnerabke is, usually, defined by those on certain benefits, which has produced quite an anomaly.
Someone on state pension only may also get pension credit to bring their income up to £182.60 per week. Another pensioner, whose state pension is a little higher to start with, may have less than £1 per week more than someone on pension credit. Those on pension credit (£182.60) have, so far, received at least £650 additional help more than those on an income of £183.
There will be similar examples for those on other benefits.
I understand there is always a drop off point with means tested benefits, but I think the targetting needs to be a little better.
Later in this morning’s Wake up to Money, one of the callers was a headmaster of a primary school. He said that once half term was finished, they would be opening a food bank at his school, and that he and many of his fellow headteachers are finding more kids coming to school in dirty clothes and without a breakfast.
It is all rather disturbing – as the boomers retire, many will rely on the state pension which will require a reasonably strong economy to pay for it, and that will require an educated workforce – not just academically educated, but vocationally educated.
Last night was a special episode of The Repair Shop, featuring then Prince Charles, who has been active in encouraging and supporting young people learning crafts. Many of the Repair Shop experts are not academically strong, but instead have hugely impressive practical skills and knowledge.
It should be a massively obvious argument that more money into education will lead to a better, stronger economy in the long term – but we are hampered by the 5 year election cycle.
‘Prime Mincer’: very good.
A reasonable discussion on R4. Your points were well made and not really challenged. Indeed, the bond trader seemed to embrace Green bonds!
Keep going and we might even find Labour thinking along the right lines soon.
I finally caught up with the Radio 5 interview. You are cutting through Richard; and Bill Blain (again) was echoing your sentiments, and acknowledging them; from a bond market perspective. Austerity is now increasingly under the microscope from all sides, and Sunak is beginning to look lmore and more ike a smooth, superficial Goldman Sachs clone, peddling outdated neoliberal nostrums, unusable in a real crisis. The Conservative’s reputation is in tatters – in the very places they least expect, and cannot afford.
I was struck by Bill Blain’s brief reference to the German Green Bonds, but delivered as a form of QE. I am not sufficiently informed on current German policy to wish to comment in detail; save to say that in a wider context, Britain appears to look more and more the anachronistic outlier, notable principally for being badly led, possessing and eccentric preference for living in a faded past, filled with bad ideas; which on close inspection are of doubtful provenance.
Danny and I proposed such a bond, weeks ago
Richard, I confess I had not registered you had proposed the Bond was linked to QE; I shall need to try and find the thread again! Jings!
You say “you don’t care if we have a bit more inflation”..What you are really saying is I will throw out the populist manta of “putting food on the table”, “allowing people to pay their mortgage” without any awareness of the consequences of your actions..cutting interest rates and printing money in the face of inflation will mean it becomes embedded..just like it is in turkey. Sterling will be crushed and everything we have no choice but to import will destroy households..what will your solution then be? To print more money??
Politely, you are talking nonsense
I am talking about real risk
You are protecting your wealth
I am protecting real people
You really are not welcome here
Derek
Come on now dear chap, putting food on the table is a humanist concept not a populist one. Helping people afford their homes BTW is a very sensible social, economic and environmental policy too.
What you want to avoid is the obvious answer isn’t it – taxation. In a modern cash/credit rich society we need to use tax to curb inflation basically. What goes in must come out yeah? This is what people like Thatcher and the Tories don’t understand with their tax cutting agenda when they did their big bang and let banks use their ‘rainy day’ money to create loans for example rather than using it to cover their exposure to risk (they now go cap in hand to government for that – would you call that ‘populist’ too by any chance?). This is why even Thatcher did not conquer inflation, because she was blind to the role of tax.
Taxing the right people and the right area of the economy will allow lower interest rates and also help to moderate any inflation caused by printing money which we will help everyone.
Money in the economy is about flow Derek and not allowing it to just pool, and letting the pool attendants rule the roost and look down on those without pools or just puddles and crying foul if the want a pool too. The economy is not a still pond. Do you understand, because it is about time that you did? It is about time that you understood that even with higher taxes you would still be better off than many others. You’ll still have enough money believe you me.
Like much of the country, you still need to wake up to the joy of tax.
Thanks
Richard, I think I have been getting something wrong and I would be grateful if you could straighten me out. I had always assumed that when the Government borrowed money, it was taking previously printed money out of circulation (or recirculating it). But if banks are allowed to “print” the money to buy government bonds, then Government borrowing will take very little money out of circulation. So that Government borrowing will be just as inflationary as printing money directly. But a lot more expensive.
Please read my articles on how QE works…
You are reading out of context
‘You are pushing against a half-open door Richard. If the door is still hard to open fully, I think that may be because the prostrate body of the Conservative Party is now jammed behind it.’
So true, so true.
I’m sure someone will correct me if I’m wrong but I can’t seem to remember any journalist or political programme actually asking why the average person (yes, I know, a cliché) loses things like their local library, bus routes, youth and community centres etc… for the mistakes (recklessness?) of markets, parliament, bankers and so on.
I suppose it sums up the state of the media in The UK.
Indeed. What’s particularly frustrating is the pretence that all this money has simply “disappeared” when much of it has simply been moved around. E.g. I understand that UK banks stand to make an extra £40 billion because of increased interest rates yet it the average UK citizen who will pay the price for the government’s pre-advertised “difficult decisions.” It’s obscene.
BBC 5 Live Wake Up to Money: Austerity 2.0?
https://www.bbc.co.uk/sounds/play/m001dflh
21:55 minutes in
BBC Radio 4 Today
https://www.bbc.co.uk/sounds/play/m001df46
16:55 minutes in
I would like to ask a procedural question please.
Sunak is currently looking at “the books”. What exactly do “the books” consist of? What documents? Are they online ? Can anyone access them? Are some of “the books” secret?
What is his guiding policy document?
In order to construct his budget, do various departments make re/presentations to him? Or just the Treasury? Other ministers?
How does it all work? Is it all explained in , er , a book , somewhere?
Good question
Government accounting is crap. The 2020 final accounts are not available as yet
So all they do is look at a cash flow
And that is split in a total arcane fashion between what they think involuntary and supposedly discretionary spending
The balance is debt – which is meaningless
A proper set of accounts has a capital maintenance concept – with capital being the thing you are seeking to focus on, which for a government should be the well-being of people. But they do niot have one. So they just focus on the worst indicator of all, which is cash, which is absurd when they can make as mice of it as they want
And they do not share the data
To describe this as lowest common denominator decision making data is to be overly kind to them
What you say seems extraordinary. If the latest set of public accounts is 2 years old, and the Treasury keep all the latest data to themselves, where are the figures for the current “hole” in the public finances coming from, which we are all arguing over?
Mr Lucas,
You may be surprised to hear that your bafflement, and the recondite nature of ‘the books’ were being hotly debated and contested from the late 17th century in Britain; and we have made startlingly little progress. The principal contestants who publicly debated the issues with some understanding of the issues, the methods and the quantum then, were John Crookshanks (n.d.) and Archibald Hutcheson MP (c.1659-1740). The issues then, as now became subsumed in political factions (in which both men were involved), and degenerated into personal character assasination, direct or indirect. Both men were accomplished in their understanding of the accounting and economic issues of the national debt (‘expert’ to use a word as controversial now as it was then), and neither would easily pass a test of ‘impartiality’.
By accident more than design, in long-term perspective, public understanding of the complex financial issues they raised can be seen to have progressed through their efforts (almost as much an unintended conseuence, as a consequence of their work); but there was then, as now no real progress in resolving the arguments between them, or deciding the facts. Rather they were sign posts on a new road, with indeterminate outcomes, still unresolved.
Some things never change.