It’s not fashionable but I’m willing to put in a good word for Theresa May. Albeit unnecessarily and misguidedly, she has worked very patiently to stitch together some sort of tenuous British cabinet negotiating position for Brexit. You have to admire her patience. I was also impressed but some of her words when she announced the Chequers deal to parliament on July 9th:
The friction-free movement of goods is the only way to avoid a hard border between Northern Ireland and Ireland and between Northern Ireland and Great Britain, and it is the only way to protect the uniquely integrated supply chains and just-in-time processes on which millions of jobs and livelihoods depend. So at the heart of our proposal is a UK-EU free trade area that will avoid the need for customs and regulatory checks at the border and protect those supply chains.
Those words suggested to me that Theresa May and her chief negotiator, Olly Robbins, have “got” just-in-time and how vital it is to our modern economy.
For a long time, whenever I tried to explain my career, I could see people’s eyes glazing over. Trying to explain in the pub that I worked in “logistics” was a concept only people who served in the army understood. I used to say I worked “in computers” instead. It was much easier. So, it is quite nice to finally see my career having some relevance to current affairs.
I spent 35 years working in IT supply chains. This involved relying on daily trucks from the Netherlands. Day after day. The crux of the job was to reduce inventory to a bare minimum, to maintain high service levels for the customer and to minimise cost. I spent those 35 years focussing laser-like on that subject – cost, service, inventory.
One thing that was crystal clear is that any interference from “customs” was death to the supply chain. We had to have VAT invoices with every truck – which was easy once it was set up. But if any shipment got taken in to be inspected or checked by customs, then it was reason for great despair. Control was lost. You can’t hurry customs officers.
Which is all why I am passionate about the UK maintaining some form of frictionless customs arrangement post-Brexit. If we don’t have such a set-up then we really are sharply downgrading our economy and risking thousands of jobs.
Evidence of this comes from an excellent article in the Financial Times a few weeks ago concerning Honda at Swindon. It starts:
Near Swindon in the south-west of England, on a site where Spitfires were made in wartime, Honda operates two cavernous warehouses that Brexit could overwhelm.
Although the combined buildings dwarf the assembly plant next door, they still only store enough kit to keep production of the Honda Civic rolling for 36 hours. This is the Japanese carmaker’s breathing space, and after a hard Brexit it might need to be bigger — much, much bigger.
Proud managers describe 2m components “flowing like water” to the factory line every working day. Some orders from EU suppliers arrive within five to 24 hours; others, such as customised car seats, are summoned from local suppliers just 75 minutes before use. Not a minute is wasted.
Honda now fears that the border checks that could be introduced as a result of Brexit will clog up the process. If Britain were to leave the customs union, Honda estimates European parts will take a minimum of two to three days to reach the plant, and possibly as long as nine days. Delivery times of finished cars may be just as unpredictable.
The article posits an astounding calculation:
To a car industry famed for its clockwork tempo, the potential delays pose an existential challenge. A warehouse capable of holding nine days’ worth of Honda stock would need to be roughly 300,000 sq m — one of the largest buildings on earth. Its floorspace would be equivalent to 42 football pitches, almost three times Amazon’s main US distribution centre. And its cost to operate would be as eye-catching as its proportions.
Indeed, writer Robert Harris has estimated that such a building would be the third largest on earth!
But we are entering farce territory. Any idea that Honda would remain in the UK for any substantial time after a “no deal” Brexit is surely for the birds.
Which brings me back to the 2016 EU referendum. Someone suggested to me the other day that people who voted in that referendum knew all about the implications of leaving the customs union. I had to control myself. It is just laughable to suggest that a significant number of leave voters had thought about the implications of leaving the customs union, above just leaving the EU, to Honda in Swindon (andother large scale manufacturing employers across the country). Indeed, look no further than Brexiteer Nadine Dorries. As recently as October 2017 she was on Whatsapp asking for clarification about the customs union.
It really what be scandalous to have a “no deal” Brexit without any further judgment from the people.
You can read the full Financial Times article here(subscription sometimes required).
* Paul Walter is a Liberal Democrat activist and member of the Liberal Democrat Voice team. He blogs at Liberal Burblings.
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62 Comments
I didn’t vote for this bonkersness either, Paul.
FT report: “If Britain were to leave the customs union, Honda estimates European parts will take a minimum of two to three days to reach the plant, and possibly as long as nine days. Delivery times of finished cars may be just as unpredictable.”
You have a background in logistics and engineering, Paul. You can actually think around the inefficiencies of Brexit.
The 2018 car manufacture problem started in the 1930s when chassis-less construction was conceived. In the UK and most of Europe, body shell plants were in one place and manufacturers assembled cars somewhere else. The body shell manufacturers weren’t always owned by the firms who made cars.
In 2018, car manufacturers in the UK put a partial assembled vehicle on a line to be worked on elsewhere, just like in the 1950s. Today, however, the next line is in another country.
I agree with the author on the logistics issue but having parts whizzing back and forth over hundreds of miles surely has to be a Green nightmare, as is having so many cars in the UK, which has long been an area where high prices and predatory finance schemes have ripped off the consumer. I am not sure if a ruined currency post no-deal Brexit will make the UK more or less attractive as a centre of car parts production but I guess there is a huge opportunity to lock out petrol engined car sales with heavy taxes (if all the car producers run off to Europe) whilst encouraging uk consumers towards electric cars made in the UK. Now that Japan has a free trade agreement with the EU they may anyway do what the Americans are doing and take production back to their own country rather than relocate to Europe. Who knows.
There is one thing which might finally convince the “Just Do It” brigade that Brexit could be a seriously bad idea – and that’s the evidence of a government which is surreptitiously stockpiling food and medicine. So that we might have, say, just a few thousand or so deaths, rather than mass starvation.
Dominic Raab says that “It would be wrong to describe it as the government doing the stockpiling…” – a remark which is dripping with evasiveness.
https://www.theguardian.com/politics/2018/jul/24/contingencies-planned-to-ensure-uks-post-brexit-food-supply-says-raab
How many weeks’ supply will be stockpiled? How can Government possibly know what will be enough? Will we get ration books? How can this reckless Brexit experiment possibly make any sense?
@William Fowler
“I agree with the author on the logistics issue but having parts whizzing back and forth over hundreds of miles surely has to be a Green nightmare, as is having so many cars in the UK…”
On the first point, bear in mind that the alternative to transport is mainly inventory. Holding inventory also costs carbon. First you have to manufacture the extra parts to fill the elongated supply chain. Then you have to transport them. Then you have to build warehouses to hold them. Then you have to heat and light the warehouses and use machinery to move the parts around. Then you have the staff for the warehouses whizzing backwards and forwards to work. Then you have the carbon cost and other ecological costs of disposing of excess inventory, which you’re more likely to have with an elongated supply chain. This is all activity which uses carbon and land. Good supply chain management is a balance between the carbon/ecological costs of transport and the carbon/ecological costs of inventory. That in turn relies on the carbon/ecological costs of all activities being reflected in their market cost. The argument that we should hold more inventory and use less transport only holds water if there is an imbalance in the loading of carbon and ecological costs into the respective market costs of inventory holding versus transport. If there is such an imbalance then that needs to be addressed.
Also bear in mind that often the use of regularly scheduled trucks is likely to avoid the need for emergency air freight – which is even more carbon generating than road transport. Bear in mind that in the computer services industry you are often dealing with well over a million component parts that might go wrong and need replacement. Even with huge warehouses in the UK, companies are not going to be able to cover all the parts that might fail and need urgent replacement.
Secondly, almost 80% of all vehicles made in Britain are exported. So if it is no longer cost effective to manufacture them here, then they are simply going to be manufactured somewhere else and other countries (most likely EU countries) will get the economic benefit – not us. By the way, we ought to consider pioneering work being done in the UK to manufacture less ecologically damaging vehicles such as the Nissan Leaf.
Also bear in mind that “just in time” doesn’t just apply to the car industry. My work was in the computer services industry.
I always look at where people are putting their money as the best guide to future events. Bookies’ odds can be useful at times.
IF things are as bad as many fear with poor old UK(PLC)Ltd teetering on the edge of the proverbial cliff, with the £ about to go into freefall etc etc, I’d expect that credit would be hard to obtain except at very high interest rates.
But what is happening in the gilt markets? Not much at all. Absolutely no sign of any panic. With yields on 15 year bonds being about 1.5%. Maybe slightly less than inflation?
Something significant is likely to happen in the next 15 years, surely? Or maybe not?
https://www.sharingpensions.co.uk/gilt-yields-chart-latest.htm
Peter
With gilt rates as they are (having recently studied them in detailed using the rates on the DMO website) you are basically paying the government for taking your money (as you intimate). The only really rational approach would be to have long term index-linked gilts if one decides that inflation is likely to rocket up, which no forecasters tend to expect.
Bear in mind that the yield is a percentage of the nominal value of the gilt. The price you pay is normally a lot higher than the nominal rate and you don’t get the difference back at the end of the term.
The EIB is offering better returns.
Why is there no panic, well that is simple because people are either
1) Not looking that far ahead. But, but you cry it isn’t that far away, yes but for the majority of people it is the other-side of Christmas and that’s well months away.
2) Deluding themselves that the Brexiteers can’t be that stupid and well they will see sense and a deal will be agreed. After all we are all sensible people.
3) Believe we are special and the EU will blink first.
4) Have started to prepare for hard times.
If we look at the groups, well group one will start to panic, probably after Christmas. Group two will eventually have to accept that yes they really are that stupid and hard Brexit is what they want. Group three will very likely be disappointed much to their discomfort. And group four, well lets say we are busy and it isn’t stock piling goods for Brexiteers, O know I wouldn’t deprive you of that experience.
Just a reminder to those that think warnings will work I’m afraid they won’t because as Franklin said
“Experience keeps a dear school, but fools will learn in no other.”
The Brexiteers are generally suffering from what I call the ‘Jean-Luc Picard Syndrome’. Sitting on the deck of the USSS Enterprise, all the Startrek Commander had to do was to tell his Second in Command to “make it so”. And he/she did just that. However, that was fantasy and in the real world, it just isn’t that straightforward.
Of course, things may not be as dire as predicted; but you cannot be sure. It just goes to show how complicated the arrangements are between the member countries of EU. JUst walking away may appeal to those people, who live their lives in black and white; but who would want to do a deal with a post Brexit UK, if it couldn’t be relied on to honour its agreements?
@ Paul,
The yield and effective interest rate of gilts are just another way of expressing the same thing. See this calculator for example.
https://www.mycalculators.com/ca/yldcalculatorm.html
A question: If EIB rates ( and maybe other euro based bonds too?) are better than offered by UK gilts, why is the Bundesbank a big customer for gilts?
I think there is a rational explanation.
Now that Jaguar Landrover, Siemens, BMW, Airbus and others have made the case publically, much to the horror of the government, that ought to have been the time when the case started to turn for Remain or an ultra soft Brexit, but the change has been slow and minimal, almost within the margin for error.
I would just about go along with a second vote and have signed the petition, but it is risky and could go either way. The Economist showed that yougov’s studies indicated that from one study, the result could go any way on a 3 way question, between Remain, soft Brexit or hard Brexit, merely depending on how the question was presented and by what vote counting methods was used. This makes a mockery of the whole direct democracy nonsense, even before the right wing popular media is accounted for.
Representative democracy with a fair voting system comes up with better results and even better still with a strong upper chamber, not nearly so affected by Whips and party tribalism, preferably democratic on a different system to the Commons.
This interesting and well argued blog on the Leave alliance site, seems to indicate that some in the Leave movement understand the issue: What’s wrong with the WTO option?
Trump and EU have agreed to move towards zero tariff and zero subsidiary trade (oddly except for auto industries) which suggests even more pressure to stay in the customs union (japan also being added to the free trade countries with the EU), by the time the UK exits the EU will have confounded things by fast tracking its own free trade deals whilst the UK will be left looking a bit silly.
Now if only they would put some restraints on free movement with a five to ten year residence test before any welfare/tax credits/social housing can be accessed, you would get close to the need for a second vote, the EU having changed into a somewhat different beast. Throw in some concessions on fiscal contributions…
Wasn’t the same thing being said 15 years or so ago when the motor industry wanted the UK to adopt the euro?
Nissan, the Japanese carmaker, said ….. that further investment in the UK depends on whether Britain joins the euro.
Does anyone think we should have joined? Just ‘cos that’s what they wanted at the time? All those arguments about how they couldn’t cope if they had to use their calculators to convert pounds to euros and back again!
https://www.telegraph.co.uk/finance/2835573/Nissan-chief-sounds-warning-over-UK-position-on-euro.html
If the UK had a more contributory benefits system such as generally on the continent, then the English arguments about migrants taking handouts would end.
If the UK used measures that are available on migration in the EU now, the issue would start to melt away. Luxembourg and Belgium move people without work outside of their borders after a short period. Luxembourg will also do this if people are borrowing money or begging to survive.
The EEA (Norway etc re. soft Brexit) also allows a break period on migration.
The truth is that UK politicians have failed to use the system available and it has blown ups in their faces under the pressures provided by the Daily Vile.
The majority of climate scientist believe that if the use of fossil fuels is not severely restricted in the next 10 years the chances of keeping global temperature rises below 2° C [let alone 1.5° C] are very low. The IPCC were having difficulty securing agreements to achieve this goal prior to the Trump presidency – it is now a forlorn hope.
Rises above 2° C takes us into dangerous territory which include very hot and dry summers – which the current [global] heatwave/drought is simply a foretaste. Since these effects will reduce global food production significantly – threats to trade provide an extremely valuable wake-up call for the government to increase UK food production and of course – the use of renewably energy.
As Katharine would say – the glass is half-full with regard to both food and energy – as we currently produce about half our requirements for both and there are many ways these could be significantly increased.
“The truth is that UK politicians have failed to use the system available and it has blown ups in their faces under the pressures provided by the Daily Vile.”
The really strange thing is that when Cameron was running around Europe per-referendum some of the press asked the Eurocrats about migration and they said straight out that we should have some kind of residence test. There may be theoretical laws that could be applied, the problem now is convincing the public that they will be properly implemented and clarification really needs to come from the EU so that the press can portray it as some kind of victory for the UK (if you want to win a second vote).
In a democracy there should be a mechanism that allows the public to sanction politicians and top civil servants if they get things seriously wrong, so rather than voting to leave the EU they would vote to cap their salaries and pensions at average levels.
The real problrm is that, for 40 years, UK govrnments of all colours have been blaming the EU for the bad and and taking the praise for the good. Even Theresa May tweeted this year that they had given us more rights over banks when it was an EU regulation.
Politicians are driven by short term political expedience. If it’s bad news blame it on someone else. Did no one notice during the coalition that it all seemed to be the LibDems’ fault? David Cameron’s ‘proudest moment’ was a LibDem policy.
The lies are continuing today. Theresa May dare not tell the people of the disaster that is about to befall them so Jeremy Hunt gets sent to Germany to start the spin of ‘when it all goes wrong it will be the EU’s fault’.
The truth is ‘Project Fear’ and lies are peddled as certainties. For 40 years the EU has been our ‘enemy’ and scaoegoat. Myth after myth is stated as ‘fact’
Theresa May promised more money for the NHS from the ‘Brexit dividend’ but the OBR says there won’t be any. Guess which headline got more prominence?
And there lies our problem. The Brexit press tells the story that it wants to tell. Bravado and jingoism. People WANT to believe it. They only read thr headlines.
If we want to change people’s minds we need to stop talking to ourselves and start talking to Leavers with cold, hard facts. Not patronising. Not big picture but how it will affect them.
I was talking to a Leaver the other day who was saying we should take back control, leave the customs union and fall back onto WTO rules. I said 30% of our food omes from the EU WTO rules would give an average 20% tariff so roughly a 6% average food price increase. They said, ‘We wouldn’t need to impose the tariff if we didn’t want to’. ‘Yes we would because WTO would make us’. ‘But that’s not taking back control…’
It’s way too complicated for most people. They close their minds to what they don’t want to hear. The MPs are afraid to vote for what’s best for the country so we are walking wide eyed to a disaster that no one has the courage to stop.
Hang on. A lot of these car-makers with the just-in-time delivery mechanisms are Japanese companies.
Are their supply chains really entirely inside the EU? Really? Absolutely none of the parts are manufactured outside the EU (say in, maybe, Japan)?
Because unless all their current supply chains are entirely within the EU, then they clearly can cope perfectly well with supply chains that cross the EU border.
WTO rules would give an average 20% tariff so roughly a 6% average food price increase. They said, ‘We wouldn’t need to impose the tariff if we didn’t want to’. ‘Yes we would because WTO would make us’.
As I understand it, that’s not true. WTO rules don’t set minimum tariffs — that would be stupid, and incompatible with the aim of the WTO to liberalise world trade (which means, eventually, abolishing all tariffs and other barriers to free trade.
What the WTO rules do say is that you can’t discriminate against, or in favour of, one country: you can’t drops tariffs or quotas for food from the EU while keeping them against, say, beef from Argentina.
But that’s fine. We just drop all tariffs and all quotas. Food — cheap food — floods into the UK from everywhere in the world that isn’t the EU. Beef from Argentina, lamb from New Zealand, unlimited bananas from Costa Rica. And you can be snooty and turn your nose up at ‘chlorinated chicken’ all you like, but the fact is millions of Americans eat it every day and they don’t starve: quite the opposite!
This is one of the things the Irish are terrified of: cheaper food from outside the EU undercutting their inflated prices and losing them their share of the lucrative UK market, unless they can drop their prices to compete. That’s why they’re so desperate for at least Northern Ireland to stay trapped in the customs union, unable to drop its tariffs and quotas.
So no, leaving the EU won’t lead to food shortages, Quite the opposite.
@Dav
“Hang on. A lot of these car-makers with the just-in-time delivery mechanisms are Japanese companies.
Are their supply chains really entirely inside the EU? Really? Absolutely none of the parts are manufactured outside the EU (say in, maybe, Japan)?
Because unless all their current supply chains are entirely within the EU, then they clearly can cope perfectly well with supply chains that cross the EU border.”
What happens across industries is that they bring in shiploads of components from the Far East at regular intervals – say every two weeks -and then stockpile those parts in one or two very large warehouses in Europe. Often this is in the Netherlands, because it is ideally placed to cover all the countries of Europe. Then the daily, hourly lorries go out from that large warehouse to the various countries in Europe. That way, the large shipments from the Far East can happen at a slower speed, going through customs etc, while the quick, hourly/daily shipments happen across Europe.
What happens across industries is that they bring in shiploads of components from the Far East at regular intervals – say every two weeks -and then stockpile those parts in one or two very large warehouses in Europe.
So in other words, yes, they clearly can cope with supply chains that cross the EU border. This is a solved problem. There are procedures that can be used.
So what is everyone worrying about?
An update on my earlier post concerning the necessary action on food and energy with regard to trade – because of the predicted impact of Climate Change.
Regular heatwaves ‘will kill thousands’
Scientists differ on whether the current global rash of heatwaves is definitely caused by climate change.
But all agree that future heatwaves will be hotter and more frequent thanks to carbon emissions.
The MPs highlight a warning from the Met Office that UK summer temperatures could regularly reach 38.5C by the 2040s.
I must say that I have been surprised by the low priority that the Party seems to have placed on Climate Change and the apparent lack of interest on LDV.
Sorry missed off the BBC link for above
https://www.bbc.co.uk/news/science-environment-44956310
Dav, There is a world of difference between a very large multinational importing large quantities of a limited number of very high value components, and a much smaller company in the UK which manufactures one of those components having to import lots of parts it uses from the EU as soon as we leave.
Don’t you do detail?
Paul: Honda won’t need a massive warehouse holding nine days’ worth of stock.
Because of the customs delay there will be nine times the number of lorries en route to Swindon and each lorry is a warehouse on wheels. But of course, the cost of the transport will rocket up because of the demurrage.
“Because of the customs delay there will be nine times the number of lorries en route to Swindon” ??
Really, is that because each one will be 89% empty ?
Paul. You are right, of course. I remember before the single market when our shipping department had more staff than sales and marketing.
But I’m afraid you are fighting a losing battle. The brexiteers would look forward to nasty foreigners like Honda having problems and would be at their happiest if Swindon went back to making Spitfires. And shortages? They’d love rationing to come back.
I will hate leaving Europe. The only good point is that it may teach these economic and political illiterates a salient lesson.
Dav,
The Japanese-owned car industry in Europe, currently including the UK, exists to build cars cost-effectively in Europe and to sell those cars primarily into the European market. Just-in-time planning and frictionless trading is key to that cost-effectiveness.
What you have triumphantly proved is that, when a Japanese company decides that some of the car components are really best made in Japan and shipped to Europe, that company might decide that the inefficiencies involved in stockholding (Paul’s big warehouse in the Netherlands) can be tolerated. They might be tolerated, for example, because the Japanese company is really keen to incorporate some home-grown Japanese content into its cars: or, because there are a minority of components which they can genuinely source so much more cheaply and/or effectively from home that it becomes worthwhile to do so, rather than buy from a supplier in Europe. However, the economics relies on such components being only a minority. The inventory costs, were all components to be brought from Japan, would cripple market competitiveness.
After hard Brexit, it will be British participation in Euro-Japanese car manufacture which will carry such crippling costs. Two possibilities exist. One, the Government “promise” to Nissan meant nothing, so Nissan (and Toyota etc) will pack up and leave Britain for the Continent in short order. Two, the Government will pay some sort of massive bung to Nissan, enough to persuade them to stay, at least until someone goes to law and gets the bung outlawed. Happy Brexiting!
Call me a cynic, but I think a lot of this just-in-time delivery from many sources is also about tax avoidance, a ten quid widget in a Bangkok factory goes through an EU warehouse and emerges as a hundred quid widget, eighty quid (taking into account transport costs etc) disappearing into a Swiss bank account. Repeat this enough times and you have some serious money floating around the system.
@JohnProbert
“Paul: Honda won’t need a massive warehouse holding nine days’ worth of stock.
Because of the customs delay there will be nine times the number of lorries en route to Swindon and each lorry is a warehouse on wheels. But of course, the cost of the transport will rocket up because of the demurrage.”
There’s a thing called safety stock which you need – the longer the interval between replenishment shipments, the more safety stock you require in order to cover volatility in supply and demand. The problem with customs delays is that they are usually not regular and predictable. So, you might think you are getting lorry A in nine days but in fact it ends up taking 13 days. Do you switch off the assembly line for four days while you wait for the delayed lorry? Of course not, so that is why you need extra stock next to the assembly line.
@Dav
“What happens across industries is that they bring in shiploads of components from the Far East at regular intervals – say every two weeks -and then stockpile those parts in one or two very large warehouses in Europe.
So in other words, yes, they clearly can cope with supply chains that cross the EU border. This is a solved problem. There are procedures that can be used.
So what is everyone worrying about?”
Timing. It takes weeks to get a ship from Japan and get it through customs. The whole basis of “just in time” is that you have frequent daily/hourly deliveries from suppliers so that you avoid stock-outs/hold-ups and don’t need to hold wasteful inventory.
@Dav
“So no, leaving the EU won’t lead to food shortages, Quite the opposite.”
As the article from the Leave Alliance website by Roland above explains, the issue is not so much tariffs, but non-tariff barriers.
@Peter Martin
“Wasn’t the same thing being said 15 years or so ago when the motor industry wanted the UK to adopt the euro?”
Well no – first of all the 15 year ago warning was “The challenge is that Sunderland is producing cars with costs in pounds and most of the revenues in euros,”. This time it is a different situation concerning the supply chain. Theresa May is quite right in aiming for a solution as she explained to parliament: “The friction-free movement of goods is the only way to avoid a hard border between Northern Ireland and Ireland and between Northern Ireland and Great Britain, and it is the only way to protect the uniquely integrated supply chains and just-in-time processes on which millions of jobs and livelihoods depend. So at the heart of our proposal is a UK-EU free trade area that will avoid the need for customs and regulatory checks at the border and protect those supply chains.”
@Peter Martin:
“The yield and effective interest rate of gilts are just another way of expressing the same thing. See this calculator for example.
https://www.mycalculators.com/ca/yldcalculatorm.html
A question: If EIB rates ( and maybe other euro based bonds too?) are better than offered by UK gilts, why is the Bundesbank a big customer for gilts?
I think there is a rational explanation.”
Have you got a link you could share to the Bundesbank investments situation? I can find reference to them investing in a whole range of sovereign gilts. Are you saying they do not invest at all in EIB gilts?
Is it possible that the investment in UK gilts is to do with the index linked gilts? For example, German inflation is at 2.2%. It’s 2.8% here over the past ten years – RPI – and 3.6% at the end of March. Perhaps it is part of their hedging policy – if the inflation situation remains higher in the UK than Germany then they are going to get a nice little income from the index linked gilts courtesy of HM UK gov, are they not?
I’ve coincidentally just received a briefing from M&G investments which states: “Effectively, if you buy a 10 year UK government gilt, you are paying our government for the privilege of you lending them money.”
Can I just ask your advice on some calculations I have done based on the DMO Gilts spreadsheet dated 19th July 2018?
If I take “1 5/8% Treasury Gilt 2028” with ISIN code GB00BFX0ZL78 with a redemption date of 22nd October 2028. Let’s just say I buy 100 units of those gilts which have a nominal value of £10,000. Using the dirty price (is that correct or do Computershare sell at the clean price?) they would cost £10,300. From my reading of the terms and conditions, the interest is paid annually on the £10,000 and is not therefore compounded. So I would get £162.50 interest for these gilts over ten years. From that I need to deduct the £54.90 fee and the £300 which I do not get back at the end of the redemption period. So I would end up losing £192.80 without even taking inflation into account. Is that right?
If so, I may as well just stick the money into a Secure Trust Bank five year fixed interest bond and get 2.67% per annum….
There’s an excellent article in the Guardian today by James Ball which highlights many of the points I made in this article:
Stockpile food in the event of a no-deal Brexit? Dream on
@ Paul Walter “If so, I may as well just stick the money into a Secure Trust Bank five year fixed interest bond and get 2.67% per annum….”
Or….. better still……, you could give it as a donation to the West Berks Foodbank ……..
– The Trussell Trust https://www.trusselltrust.org/get-help/find-a-foodbank/westberks/
West Berks Foodbank. Main Location. (Postal Address only) Salvation Army Hall 8 Northcroft Lane Newbury RG14 1BU. Phone. 07955 626621. Website.
…………and get a nice warm glow by doing your bit to counteract the effects of Universal Credit & Pip as constructed and introduced by the 2010-15 Government.
Indeed, David, I gave them a whole shopping trolley’s worth just a week ago. 🙂
Paul,
the coupon is the interest rate on the nominal amount of the gilt. If you buy 1 5/8% Treasury Gilt 2028 you will get an interest payment of £81.25 every six months (£162.50 per year) and repayment of the 10k capital sum in ten years time.
The yield is the effective return as a % of what you pay for the gilts. if you pay £10,354.90 for the gilts your effective yield is less tham 1.625% coupon rate. The return on your investment is 1.569% (1 3/19%).
With inflation at 2% to break even in real terms (i.e. maintain the purchasing power of your capital outlay of £10,354.90) you would need a total return over 10 years of £12,633. What you will get is £11,625 i.e. a diminution in capital of £1008.
M&G investments are correct to state: “Effectively, if you buy a 10 year UK government gilt, you are paying our government for the privilege of you lending them money.”
From the public finance perspective, borrowing costs below expected inflation indicate not only that the government has room for more borrowing for investment, but that it would be a missed opportunity not to significantly expand capital investment in infrastructure and public housing in such a favourable lomg-term interest rate climate.
From the perspective of pension funds and similar financial institutions that rely heavily on government bonds to fund their future pension liabilities, low yields are problematic and are a key reason for widening pension fund deficits in many defined benefit pension schemes. Similarly, the low returns mean historically low annual pensions offered to pensiones buying an annuity from a defined contribution pension pot.
A no deal Brexit could be the final straw in the demise of our manufacturing industry. It only takes a few extra challenges to our already challenged island state logistics for most global players to move their industry over the sea. It could make us more self reliant and manufacturers down size for the home market.
@Joseph Bourke
Thank you very much indeed!
Paul. Well done you.
@ Paul Walter,
That’s a good tip about the 2.67% return. That’s pretty good at the moment. You’d have to send me more info about the spreadsheet if that’s serious question.
Going back to why the German central bank buys UK bonds, gilts, etc I think you’d have to agree its not about a fraction of a % on the rate of return. The pound fell quite a lot after Brexit which would have made even the 0.6% difference you mention neither here nor there. Incidentally I suspect the BoE was more behind that than generally admitted. They have a remit to keep inflation at 2%. They couldn’t reduce interest rates any further so they had the perfect motive to dump ££ into the market to depress its value – just at the precise time they could divert attention from themselves.
Countries like Germany just have to run current account surpluses. It’s in their DNA not to do otherwise. That means they inevitably acquire pounds than they can use. They just have to recycle them back to their UK customers using bond purchases. Any deficit in the current account has to be matched by a surplus in the capital account or the pound shifts in value. In other words what else can they do with them? If they spend them or swap them for euros with someone else who might spend them there goes their surplus! They need to keep the pound from falling too low or else we can’t afford their exports.
Over the years Germany, along with all countries who wish to net export to us, has accumulated significant quantities of UK debt. So what are they going to do with us? Feed us to the wolves and see their assets become worthless?
Peter Martin,
the Bundesbank foreign reserves at 167 billion euros are not excessive based on German annual imports of $973 billion https://www.bundesbank.de/Navigation/EN/Statistics/ESCB_statistics/International_reserves/eszb_table_view_node.html?statisticId=assets and are not significantly greater than the $167 billion held by the UK https://www.bankofengland.co.uk/statistics/uk-international-reserves/2018/march-2018.
German public debt at 64% of GDP is similarly not massively less than the UK’s 84%.
Freely convertible currencies are fungible and easily exchanged in foreign exchange markets for Euros for reinvestment in Eurozone economies or dollars in the USA and elsewhere.
I wouldn’t count on the Bundesbank to prop up sterling. While the UK is an important export Market for Germany their biggest market is the EU followed by the USA and China. The UK accounts for about 7% of German exports.
It’s foreign direct investment in the UK that is important to the UK balance of payments. When that dries up, central bank selling of excess reserves pushes the value of sterling down, the price of UK imports up and a subsequent squeeze on living standards.
@ Joe B,
I notice that the Bundesbank used the term ‘short term’ and ‘highly liquid’ in the link you sent so it is important to distinguish between what might be held as pounds and other currencies in their reserve account (we’d call it a current account) and what they hold generally. I’d just make the point also that as Germany uses the euro the picture is slightly more complicated and reserves held at the ECB have to be taken into account.
Germany does have a current account trading surplus of getting on for €300 bn. That’s just in one year. At this rate it accumulating a surplus of €1 trillion in just over 3 years. So what happens to it? It can’t spend it -otherwise it wouldn’t be a surplus.
Except, its not quite right to say that its 1 trillion euros . The USA is Germany’s biggest net customer and they don’t have euros. They have dollars. The UK is Germany’s second largest net customer and almost as beneficial as the USA. We don’t have euros either. We have pounds. So yes, modern currencies are fungible as you say. Germany can swap pounds and dollars for euros on the forex markets. But it already has more euros than it knows what to do with. Why would it need more?
So like all net big net exporters it is effectively caught in a bind. It’s economy is geared up to export. But it can’t do anything with what it earns from those exports! It just has to save them in the currency it has earned to keep overseas customers coming back for more.
If the UK economy crashes and burns after Brexit it isn’t just a simple matter, for Germany, of replacing 7% of exports. It needs to find someone else who buy all the stuff we do now buy from Germany but will only expect Germany to buy less than half as much. Where are they going to find anyone else like that?
https://www.destatis.de/EN/FactsFigures/NationalEconomyEnvironment/ForeignTrade/Tables/OrderRankGermanyTradingPartners.pdf?__blob=publicationFile
Peter
The daily DMO Gilt purchase and sale service prices are here:
https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D10B
Joe has kindly answered my question and provided the maths.
“But it can’t do anything with what it earns from those exports! ”
It does what the Chinese are doing. Buy up afore-mentioned losers’ houses, hotels, shops, industries, infrastructure etc to provide a long term income stream. It buys gold to insulate itself against currency shocks. It buys a strong infrastructure in its own country and generally enjoys all the benefits of success.
In, fact exactly what a previously successful exporting empire once did.
Three ironic cheers please, for the faded British.
@JoeB @ Paul
Yes JoeB is quite right, as far as I can see, about how gilts work. The ‘coupon’ at one time was a part of the paper certificate which could be cut off and removed in exchange for annual payments. Hence the name. I didn’t follow what was being asked about the spreadsheet. No matter.
It all comes down to the simple fact that if you lend your money to the Govt you’ll get some interest payments just like if you put it in a term deposit at the bank. So why doesn’t Govt just structure the accounts it offers in the same way? Is it just tradition?
“From the public finance perspective, borrowing costs below expected inflation indicate not only that the government has room for more borrowing for investment” ??
Borrowing costs are low because the Govt wants them low. The BoE has intervened in the market to buy up some £400 billion worth of bonds, ie QE, which raises their price and depresses their yield as Joe indicates with his maths. The whole point of QE was to lower longer term interest rates. So it doesn’t quite follow that having lowered them by intervention, the Government can then say “Ah ah. This is a sign from the market that we can borrow more”
We can borrow more, and we can always borrow more at whatever low interest rates we like, providing that we don’t create excessive inflation caused by the extra spending the borrowing creates.
Innocent Bystander,
There are, I agree, two possible ways to look at the question of the current account trade deficit. There’s your way and there’s the alternative way to say that exports are a real cost and the reason for exporting is to be able to afford to import those things we can’t produce for ourselves. So if we can’t grow mangoes in this country (except we may soon if the climate changes!) then we export something else in exchange.
The latter way makes more sense to me but I agree that yours is the majority view in the wider world too. In which case we should do what Denmark does and peg our currency to the euro at an artificially low rate. How do you fancy 1 euro to the pound? Or even lower? That’s why the Danish pork industry is so competitive.
Maybe all countries should depress their currency to run an export surplus? 🙂
But that would only lead to trade and real wars. Some of us do have to let our currencies truly float and run the deficits that others need to run their surpluses. It all does have to net sum to zero.
“It all does have to net sum to zero.”
You just can’t stop economists wanting to model the entire planet as an exercise in intellectual self-indulgence.
There will be winners and losers in the world’s increasingly bitter economic rivalry, and there will continue to be until One World Government breaks out. Until then I want my country to be one of the winners although I readily accept that there will have to be losers to neatly balance your sums.
I just don’t want us to be one.
Peter Martin,
the big exporting companies typically run large public service deficits including China and Japan are a case in point. Germany ran deficits for 40 yeas until 2015 and has only gone into surplus since then, largely as a consequence of very low interest on public debt.
The Bank of England can set short term rates that determine interest paid on bank deposits and influence longer term rates, but bond yields are set by the demand for gilts by buyers.
Gilts compete with other sovereign bonds like US Treasuries and Eurobonds and other forms of AAA rated financial securities. Hence longer-term interest rates are determined by global economic factors. In a low growth low inflation environment, uncertainty drives bond yields down close to or below inflation where the demand for safe haven assets remains high. As global economic growth and optimism (and potentially inflationary pressures) picks up, bond yields increase.
Long-tern interest rates have been historically low since the late 1990’s. When the yield curve flattens i.e. long term rates and short term rates show little differential, it can be a sign of economic stagnation as has been the case with Japan or during the long depression of the late 19th century. Japan has found it increasingly difficult to stave off deflation and return the economy to growth since the 1990s.
Fallacies of composition are not unusual In economics. The paradigm of thrift is one and as you note – some of us do have to run the deficits that others need to run their surpluses. Similarly, the UK can’t maintain low interest rates while other risk free assets have higher rates of return to attract internationally mobile capital. This is part of the reason why UK bond yields have increased by some 50% over the last two years as the US Fed began increasing interest rates.
Innocent Bystander,
“You just can’t stop economists wanting to model the entire planet as an exercise in intellectual self-indulgence.” Economics is not called the dismal science for no reason.
Your conclusion is probably right. There is only so much that a government can do to steer the economy. Adopting the Hippocratic oath of “First, do no harm” would be a good starting point for policymakers.
For all the sophistication of econometric modeling, you can’t get away from the basic principles of self-interest or as Adam Smith put it “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
Keynes used the term ‘Animal Spirits’ to describe the instincts, proclivities, and emotions that ostensibly influence and guide human behavior, and which can (theoretically) be measured in terms of, for example, consumer confidence.
Foreign investors and Sovereign wealth funds don’t have to buy UK gilts. They can channel investments into real property, high-grade corporate bonds, shares of companies listed on the London Stock Exchange, acqusition of UK businesses or direct investment in the expansion of business facilities in the UK. The guiding factor in the choice of investment is always self-interest of investors.
If ultimately there are too many pounds sloshing about for the sterling investments that are planned to be made, the currency will need to devalue overtime to correct the imbalance.
@ JoeB,
OK but if Germany ran deficits, they generally were pretty small. There might have been a temporary exception to their ‘Swabian Hausfrau’ economics during the re-unification period but generally speaking they like running export surpluses and balanced budgets.
If Germany as whole runs a current account trade surplus the net inward flow can end up in two places. The savings accounts of German people and companies. Or the Govt’s coffers. So the question of a Govt surplus does depend on the extent of saving in the Private Domestic sector.
I would say ‘influence ‘ longer term rates is something of an understatement. True they can’t just set longer term rates by decision of a committee but they can instruct the BoE to by up or sell bonds in the market to raise and lower yields and effectively the interest rate. They can even just instruct the BoE to credit the Treasury’s account with enough spending money- which they do anyway in anticipation of the proceeds of bond sales. That’s interest free money. Should they do that? There will be howls of outrage by those who say we’ll end up like the Weimar Republic or Zimbabwe but effectively this is what QE is. Except the BoE buy up bonds from the market at the same time as the Treasury is selling new bonds into the market to avoid being seen to deal with the BoE directly.
If they can do that to bail out the banks – then why would a fraction of that amount to bail out the NHS be a problem? It depends on the level of activity in the economy -of course.
Yes if the USA is offering higher rates maybe we need to also. But just ‘maybe’. There are arguments either way. If Germany and China want to run an export surplus against us they just have to do something to stop the pound falling. The capital account does have to balance out with the current account.
What does it mean to be downgraded to AA from AAA? That we are more likely to forget how to create our own currency? The risk is only one of inflation and we’ve had a higher rating in the past when inflation has been quite a lot higher. The concept of credit ratings is a nonsense, BS even!, for the US and UK govts.
@JoeB and @ Innocent Bystander
This is an intersting article from the Guardian. The problem is that the ‘Swabian Housewife’ doesn’t understand that the world economy would grind to a shuddering halt if everyone followed her advice. The eurozone countries don’t just have advice – its written into the rules of using the euro. The ‘Swabian Housewife’ has had a definite say in writing those.
She doesn’t understand that those who run deficits aren’t necessarily losers and those who run surpluses aren’t necessarily winners.
https://www.theguardian.com/commentisfree/2008/dec/12/germany-economy
Keynes rebutted the money veil attitude of classicals and dismissed it as erroneous. He points out that the presence of money in the economy and more particularly its functions as a store of value (as a link between the present and the future) affects the income, output and employment in more than one way. To him, the monetary sector is an integral part of general economic system.
Keynes general theory is a ‘theory of a monetary economy’ in which the rate of interest occupies an important place, which is determined and affected by the demand for and supply of money. Thus, according to Keynes, money affects the rate of interest and through it investment and hence the general level of economic activity, output and employment.
Keynes noted that people can hoard their money incomes in the form of cash, bonds and securities. They can store their savings in such liquid assets as give rise to yields.
Post-Keynesian economics further elaborated the concept and thus the relationship and distinction between ‘Money’. ‘Near Money’ and ‘Liquid Assets’ came to be recognized as theoretically important.
Professor Dennis Robertson, studied under Keynes at Cambridge. He maintained that government policy should attempt to stabilize the price level and that bank deposits were of paramount importance to the money supply. Robertson developed a dynamic theory of saving and investment. It was one of the key features in his criticism of Keynes’s. He said “It is necessary for the students of economics to try from the start to pierce the monetary veil in which most business transactions are shrouded to see what is happening in terms of real goods and resources; indeed so far as possible they must try to penetrate further to see what is happening in terms of real sacrifices and satisfaction. But having done this they must return and examine the effects exercised upon the creation and distribution of real economic welfare by the twin facts that we do use the mechanism of money and that we have learnt so imperfectly to control it.”
“‘Swabian Housewife’ doesn’t understand that the world economy would grind to a shuddering halt if everyone followed her advice. ”
She’s smarter than you think. She knows that some bits, but not all, of the world will follow her advice, absolutely not everyone, because most are weak, have no work ethic and are following the siren voices of misguided economists.
She, and her countryfolk, will prosper nicely, thank you following the example of the British Industrial Revolution and its former world economic domination (now dead and gone). They will plunder the losers (they are plundering us publicly enough, I am surprised you hadn’t noticed).
The evidence of losing, and its consequence, is around us, everywhere. For the evidence of the benefits of winning you will have to visit some other countries.
“For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath.”
“They can channel investments into real property, high-grade corporate bonds, shares of companies listed on the London Stock Exchange, acqusition of UK businesses or direct investment in the expansion of business facilities in the UK. ”
That’s exactly what they are doing and to a dominating and frightening degree. Any business assets or intellectual property that can be relocated they take away.
Any that can’t they turn into a future income steam that will yield real returns for ever no matter the exchange rate will be then.
Hinckley Point C is a perfect, and infamous, example of the shame and poverty we have inflicted on our grandchildren by insulating ourselves from reality by clinging to seductive nonsense (such as Keynes) instead of finding the courage to change our society to properly compete in a pitiless world.
Germany is different as Professor John Mullbaeur wrote recently is respect to housing supply.
“…a German phobia of inflation and a thirst for sound finance was strongly influenced by the hyperinflation of 1921–4. With attention to sound finance by Germany’s bank regulators, inflation has remained subdued. The differences in the respective inflation histories helps to explain the mainly fixed rate mortgages in Germany versus the prevalence of floating rate mortgages in the UK. Cultural differences have roots that may go back even further. Eichel traces such influences back to the Reformation of 1517; she argues for the profound influence of Lutheranism on Germany in the 19th century. Lutherans are less individualistic than Calvinists; they should work for their community, where work (Beruf) becomes a calling (Berufung). Profit without work is suspect and saving is a moral imperative, which even has a manifestation in language: in German, debt (Schulden) is associated with guilt or fault (Schuld). The Prussian welfare state has Lutheran roots, and an example is in the collective nature of the (PAYGO) German pension system. This has lowered the incentive to invest individually in private pensions and helps explain the lower ratio to income of illiquid financial assets in German household balance sheets .
…Britain’s relatively free-trading, individualistic, profit-seeking culture may be rooted in the shaking off of the yoke of the Catholic Church under Henry VIII. Britain’s navy for a time ‘ruled the world’, and British merchants (and speculators) made the City of London culturally powerful. The industrial revolution began in Britain and free-trading industrial interests challenged the land-owning aristocracy in the 19th century (for example, in the abolition of the Corn Laws). The elites feared popular pressure to extend the voting franchise, initially restricted to property owners, and saw extension of property ownership as a bulwark to protect against socialist, populist revolution. The favourable tax treatment of owner-occupation by governments in the postwar years can be seen in a similar light. Later, Mrs Thatcher’s granting of ‘right-to-buy’ to tenants in council housing and boosting share ownership explicitly also aimed to help create a ‘property-owning democracy’.
To return from the labyrinth of sectoral analysis to the subject of supply chain risks, one aspect not covered (apologies if I missed it in the long comments thread) is that of ‘Rules of Origin’.
Many trade treaties include Rules of Origin that specify that, for certain products categories made in exporting country A and imported into country B, there must be a minimum percentage, X, of its content made in A. In this context ‘A’ is, of course, the EU.
For manufacturers this presents serious risks. If the UK drops out of the EU, then some their products may no longer qualify for export on favoured terms secured by EU trade treaties to some or all of their markets. If it’s just a few nuts and bolts that probably doesn’t matter much. However, if it’s a bigger item like a car engine, then it probably matters a lot.
This is such a company and product-specific issue that I doubt that anyone outside of the companies concerned has even the most approximate handle on it. However, it will be so pervasive an issue in manufacturing that, especially on top of all the other issues, it’s highly likely there will be plant closures as supply chains are ‘de-risked’.
Expect substantial redundancies.
Good point Gordon.
@ Joe Burke,
“…..a German phobia of inflation and a thirst for sound finance was strongly influenced by the hyperinflation of 1921–4.”
Ok but this was just a three year period. Unemployment was close to 30% in Germany in the early 30’s which lead to you-know-what shortly afterwards.
So why don’t the Germans have a phobia about high levels of unemployment in the EU? Or a phobia about the rise of the far right? Or is it OK if it’s elsewhere in the EU?
It is a great pity that more was not made in 2016 of supply chain Just-in-time issues.
On the streets in 2016 and at stalls I suggested Honda but was met by complacency and denial, even on the Remain side.
With today’s leaked news I hope I was wrong.
This goes back to trying to exclude reliable, popular Japanese cars through a “voluntary” agreement and the use of the common external tariff.