As economy shrinks again, Oakeshott calls for Osborne to be moved to make way for “our A team at the treasury”

Here’s how The Guardian reports the call by Lord (Matthew) Oakeshott for George Osborne to be moved from Number 11 in the wake of today’s fresh dire news on the economy:

A senior Liberal Democrat peer has called on George Osborne to be sacked as the chancellor continued to insist the government was on the right economic path, despite “disappointing” official figures released on Wednesday that show Britain is enduring the longest double-dip recession for more than 50 years.

The chancellor stood firm in the face of increasing pressure to rethink his economic strategy after shock figures from the Office for National Statistics revealed the economy shrank by a worse-than-expected 0.7% between April and June.

Labour repeated its calls for a “plan B”, but Osborne was also subjected to pressure from the coalition ranks as Lord Oakeshott, a former Lib Dem Treasury spokesman, criticised the chancellor’s strategy and suggested the Treasury needed a new minister at the helm to steer a new course.

“Any business failing its key objective like this would change its strategy or its management or probably both,” said Oakeshott. “Britain should do the same now with a bold plan A-plus. We need our A team at the Treasury.”

However, Vince Cable has stood by the Chancellor, distancing himself from Lord Oakeshott’s comments according to The Guardian’s Nicholas Watt:

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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  • Daniel Henry 25th Jul '12 - 2:12pm

    I think trying to replace Osbourne with a Lib Dem is a bit unrealistic, but surely at the least we want him replaced with another Tory. He’s the coalition’s biggest weakness and liability right now.

    Ken Clarke has had experience with dealing with a recession and he’s quite well respected from all sides. I think he’d not only be FAR more competent than Osbourne, but less ideologically divisive too.

  • Mike Barnes 25th Jul '12 - 2:36pm

    Cable has no right to criticise George Osborne. Vince signed up to the cult of expansionary fiscal contraction, he’s part of the problem.

  • Bill le Breton 25th Jul '12 - 3:39pm

    The economy has stagnated since the Coalition increased the rate of budget consolidation.

    The reductions in Government spending have been predominantly in investment.

    Throughout this dismal period the Bank of England’s Monetary Policy Committee has kept monetary policy tight (witness falling inflation and low interest rates, the signs of tight monetary policy).

    We are imitating Japan and are suffering similar stagnation (and rising debt).

    We must relax (and change) the target given to the MPC (so that the new Gov investment is not offset with monetary tightening as it would be without a relaxation of that target).

    We must insist the MPC introduces abrupt monetary easing until the new target (NGDP 5% growth) is reached.

    It is the economic policy that must change and, given the mechanism for such decision taking in this Coalition, that is as much the responsibility of our two members of the Quad as it is of the Chancellor.

  • If in 2010, you’d got all the MPs in a room and given them some kind of economics 101 test, where would Osborne have scored?

  • Richard Dean 25th Jul '12 - 4:35pm

    Today on Sky News I thought I heard the Chancellor say the Bank of England is operating a loose monetary policy. Do I need to talk to an ear specialist?

  • Richard Dean 25th Jul '12 - 5:18pm

    Could Bill le Breton and Duncan Stott please clarify, for dumbheads like me? Thanks in advance! Or is one of you joking?

    Bill says low interest rates are a sign of tight policy, Duncan says they are a sign of loose. Which is it? And what does loose and tight mean?

  • ‘rein in’, as in horse, not ‘reign in’ as HM!

  • Bill le Breton 25th Jul '12 - 6:39pm

    If monetary policy is loose why is the demand for money greater than the supply of money?
    Why is inflation plunging?
    Why is nominal gross domestic product increasing by an annualized rate of 1.8%?
    It is a mistake to assume that low nominal rates equal loose monetary policy.
    It is this ‘money illusion’ which is preventing a recovery taking place.
    When nominal rates are at the zero bound the Central Bank has to step in to create money – its efforts have been tardy and hesitant. We are all paying the price.

  • Gareth Jones 25th Jul '12 - 7:00pm

    Explaining the government’s dilemma, Vince Cable, the Lib Dem business secretary, said: “We have built up a lot of credibility in international markets. We don’t want to lose that position.”There is flexibility built into our fiscal plans, we have that. There are other ways of maintaining stimulus to the economy. There is monetary policy and we can use imaginative infrastructure development to push the economy forward domestically.” Plan A + ?

  • Richard Dean 25th Jul '12 - 7:25pm

    Duncan appears to be correct and Bill wrong on terminology. The Bank of England says so.

    Charles Bean is the Deputy Governor responsible for monetary policy. He endorsed a book called “Macroeconomics: a European Perspective”. The book says that monetary tightening is monetary contraction, which is a change of monetary policy that leads to an increase in the interest rate. The increase causes investors to prefer to give the bank cash and receive interest-bearing bonds in return. This reduces the amount of money available in the economy in the short term – the BofE has the money and the economy has the bonds.

    So, a loose monetary policy is one where the economy has more cash and less bonds, and is achieved by keeping real bond interest rates low.

    What Bill seems to be advocating is not a loose policy, but an inflationary one. It is easy to see the attraction. Inflation means that companies will cash mountains face a loss if they don’t invest in job creation. By contrast, if they do invest, they may reap profits but they also face risks of losing everything. It’s a balance and it seems that an increase in inflation may tip the balance towards investing to create jobs and growth.

    But there are obvious problems. Inflation makes poor people suffer, since their wages are likely to lag behind. It makes savers suffer – people saving for a big purchase or for retirement. But worse, a cash mountain is not stagnant in a bank. The bank invests most of it – in bonds, shares, or loans – and some of these investments may already be creating jobs, or at least preventing job losses. And if these investments are made overseas, they may be bringing in valuable foreign exchange, and so benefitting the country generally.

    So Bill’s option seems to be to reduce cash mountains and increasing inflation, maybe increase government debt too? The policy has benefits but will also cause damage. It seems to be a matter of arithmetic whether the net effect will be good or bad. Does anyone have any numbers that can help chart a way forward?

    With apologies to all I have wronged, and a warning that I make many mistakes and humbly welcome the learning that comes from logically argued correction!

  • Bill le Breton 25th Jul '12 - 7:43pm

    Rushed at moment and will respond later but I know you like to read sources. Try this
    The key passage is:
    “Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy..After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”

  • Richard Dean 25th Jul '12 - 7:58pm

    Its certainly a serious matter if the depty Governor of the bank of England responsible for monetary policy gets his tighenings and loosenings the wrong way around! Maybe it’s just a matter of terminology – like potato and potahto – but I look forward to further information.

    For the moment I observe that much of what Milton Friedman writes is consistent with the book I mentioned. But he seems to use “tight money” to describe a reduction in the rate of increase of the money supply (or perhaps a reduction in inflation), rather than a reduction in the money supply per se.

    Americans are strange people, with a language that is definitely not English!

  • Vince Cable: I disagree with Matthew Oakeshott’s call for new team at treasury. Osborne doing good job…………………….

    Osborne’s only plan isn’t working; his last budget ended up with more ‘about turns’ than an army parade ground, and his only response appears to be ,”The situation is disappointing”.

    If that’s a ‘good job’ I’d hate to see your idea of a ‘bad one’.;

  • I’ll attempt to umpire the money dispute.

    Money is too tight. The Bank is trying to loosen it, but failing.

    Whether one calls this a loose policy or a tight policy depends on whether one is looking at intentions or outcomes!

  • Paul McKeown 26th Jul '12 - 12:56am

    I had to snigger when I heard Matthew Oakeshott earlier today: he says what a lot of people think, but doesn’t give a fart in church who he upsets by saying it. In terms of political differentiation he clearly is worth his weight in gold.

    Vince Cable, David Laws and Chris Huhne – well they all have my respect, great team, all intelligent, all with experience of the real world, each with different talents. Always liked Chris Huhne, a real pugilist, with a particular line in getting up Tory noses, a figure otherwise lacking on the LDs front bench. Now facing the beak and so until that is resolved no further role to play. Vince. Well Old Uncle Cassandra has been telling the truth to power since long before it was popular. And it still isn’t particularly yet, either. But I suspect that he’s earned a fair bit of respect from his knockers by now, even from George Osborne. As for David Laws, well he has his knockers too, many on this site. But he was a breath of fresh air, wasn’t he, as Chief Secretary? Remember how limpidly he demolished the previous Labour Treasury? No knockabout, no histrionics, just the facts, logical argument and good presentation. The Labour front bench was kecking its collective pants, its bluster so ruthlessly exposed. The Treasury has missed such a clear communicator ever since The Daily Tory Prat stuck its oar in, something it perhaps, on reflection, regrets.

    Oakeshott is right: that would be a great team in the Treasury.

    There isn’t a vacancy, though, and I rather suspect that George Osborne being pushed out would result in a change of government. And what is the truth about George Osborne? Well he has earned the respect of the markets: that is something that a Labour Chancellor might well have struggled with. His problem is how to convert that market confidence into something electorally tangible. It’s also a time limited commodity: further economic decline will see that confidence evaporate.

    It’s not that there isn’t a lot of money out there looking for something to do. A lot of pension companies and insurance companies are awash in liquidity, but they have nowhere to put it. Private savers in this country and those on fixed incomes are desperate for a bit of interest, too. It’s certainly not as though there isn’t plenty to spend that money on. An energy system for the 21st century. A railway for the 21st century. A road system desperate for the potholes to be filled in. A housing stock which needs retro-fitting with insulation. A shortage of housing where it is needed. Internet communications that lag well behind those of other industrialised economies. Defence forces kitted out for last century’s wars. A water infrastructure that cannot provide water from the wet parts of our country to the consumers in the dry parts of our country, cannot cope with the quantities of effluent that our cities now produce and cannot cope with the flooding that increasing levels of climate change are confronting us. Osborne’s job now is to find a way to marry that liquidity with the infrastructure investment that this country is crying out for. He is supposed to be a clever man, so I’m sure he will find a way which doesn’t lose market confidence at the same time. The Guardian is comparing him with Neville Chamberlain, which seems a bit of a daft analogy. Chamberlain managed to leave the Treasury with a stronger economy than when he entered it, with a completed national electricity generation and transmission infrastructure. Osborne needs to accept Chamberlain’s mantle, but he won’t do that by dicking around trying to please the Tory backbenches. They are irreconcilable short of a general election. Half a trillion of extra investment over the next ten years, without the Treasury spending a penny more: that is the conundrum.

    I have had to snigger hearing this nonsense of Clegg out, Cable in. Or Davey. Is anyone else really mad enough to want to do Nick Clegg’s job at the moment? He takes vast quantities of sh!t on a daily basis and he takes it with an enormous sang froid. I reckon his missus and his kids must be the LD’s greatest assets, as without strong personal support, no one could take such abuse without cracking up. I’m sure various options for the future are being considered, but a public airing certainly won’t help. Whether Nick Clegg leads the Lib Dems into the next election I have no opinion on, but of thing I am sure. The man has my respect.

  • Richard Dean 26th Jul '12 - 1:11am

    @David Allen
    Ah, clarity, thanks, you may be right!

    @Bill le Breton
    The graph in Milton Friedman’s piece about Japan is indeed interesting, thanks very much for the enlightenment.

    The graph shows Japan’s inflation rate, its year-on-year growth of nominal GDP, and its year-on-year growth of the money supply, from 1969 to 1997. I assume that the money supply is nominal. Real is obtained by subtracting inflation from nominal. It’s possible from this data to calculate how the real money supply varied over the 18-year period, and how the real GDP varied. If you plot the result on log scales in Excel you get a very clear relationship. Real money supply increased in proportion to the 5/3 power of real GDP.

    As Friedman suggests, this must have been a deliberate policy by the Bank of Japan. It means, for example that if the Bank of Japan was expecting real GDP to increase by 5% in a particular year, it would have purposefully increased the real money supply by 8.5% that year. Friedman suggests that Japan’s success ended when it tried to stabilize the yen against the dollar, so maybe exchange rates are a problem , but Friedman’s analysis of this seems wrong – the dates he cites in his text don’t seem to chime with the collapse of growth in 1992.

    To me the power relation between real money sypply and real GDP suggests that money flows faster as real GDP rises, which means a more than proportionate rise in real money supply is needed to support a given rise in real GDP. I don’t see this as implying that an increase in money supply causes a rise in GDP, only that an adequate increase in real money supply is needed to support a real GDP rise that is caused by something else, such as investment, opening up of foreign markets, deregulation, and innovation, and I do seem to remember that this was what Japan was doing then – weren’t we all “turning Japanese”?

    . I do agree that these data suggest that the Bank of England’s monetary target might be better specified in terms of the real money supply – NOT in terms of inflation, and NOT in terms of nominal GDP. But then again, are the issues and conditions for the UK now the same as the issues and conditions for Japan then?

  • Bill le Breton 26th Jul '12 - 8:26am

    Good Morning Richard,

    You may find it is time you met Professor Sumner

    Japan is the only guide we have to the territory that we, along with the Eurozone and the US, are in. The 1930s should be of use, except history has over rated the effects of the New Deal and the war in the eventual recovery.

    In your analysis above I think you need to introduce the role of expectations. For instance money flows faster (as you put it) when people *expect* prices to rise.

    Each day we deal with money and react to prices and wages expressed in the currency. The value of which is changing all the time. Why should we expect a theory that tries to ignore money and deals in the so called *real* to be particularly accurate or useful?

    It is for this reason that changes in the nominal or money GDP is so important.

    In 2007 Central Banks tightened monetary policy in reaction to rising global commodity prices just as NGDP fell 8% in a year. Had they been monitoring and responding to NGDP they would have loosened, but with a 2% inflation target they tightened.

    As a result the ‘fall’ was experienced as a fall in output. We have never regained that lost output/income. That was the income that made the then levels of debt sustainable.

    By the time the Central Banks reacted, the interest rate required to restore the position was negative. The banking system was in negative equity. You all know the position.

    But the ‘hawks’ remained dominant still pointing to the threat of inflation, when the real concern was deflation – the expectation that prices will be lower tomorrow than they are today. “Hold your cash … its value is appreciating.” “Buy anything that will maintain its value – at least you’ll get your capital back.”

    That is where we are now.

    But if you were convinced that your cash would be less valuable tomorrow what would you do?

    That is where we need to be.

  • Tony Dawson 26th Jul '12 - 9:57am

    While people are right to say that what Bill le Breton proposes is ‘inflationary’, the ‘inflation’ has in fact happened already in that the people of this country and their governments have spent years buying goods and services of a greater value than the economy which they are operating (in term s of output) can ever expect to pay for, with the promise of “just wait a bit and lend us a bit more and it”ll all come right.” Essentially, we have pretended that our collective output is worth more than it is. The moment we start pricing our nation’s collective ‘labour’ realistically, prices will rise. The proper way to pay for the cumulative results of this deception is to mobilise capital, particularly the capital of those who have profited from the years of deception. Note I say ‘mobilise capital’ rather than ‘print money’.

  • Richard Dean 26th Jul '12 - 10:25am

    No, Professor Sumner does not seem to be a good way to go!

  • Richard Dean 26th Jul '12 - 11:02am

    If people are convinced that their cash will be worth less tomorrow than today, and so decide to spend today, they are making their decision on the basis of their perception of REAL value, not nominal value. That is why REAL money supply and REAL GDP are the important factors.

  • IMO. people do not earn enough to lead a consumer lead recovery. Borrowing went up as a result of artificially inflated house prices and wages that don’t really cover that most basic of living costs. This has in turn lead to higher rent thus fueling higher cost to the government in the form of a housing benefit payment explosion. Tax credits have been used to keep wages artificially low and prices artificially high. The realty is that the cost of living is too high for a lot and possibly even the majority of the population. It’s built on false money, false profits and maybe even needed to collapse further in 2008. The monetary policy at the moment sometomes seems like its trying to disguise the fact that the pound doesn’t go very far in its homeland.

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