It’s Friday, it’s five to five half-past seven, and it’s time once again for…
2 big stories
Yesterday, Matt Hancock announced that he was writing off £13.4 billion worth of NHS debt – on the face of it a thoroughly good thing. Of course, you find yourself wondering how it could have repaid that debt anyway, and the problem of the legacy of PFI remains a shadow over the finances of our healthcare, but it will obviously help to ease the burden on day to day finances in our hospitals.
Ten million Americans have applied for unemployment benefits in the past fortnight, effectively wiping out nearly all the jobs created in the past five years, with economists predicting that forty million people will be out of work by mid-April. And with many of those people reliant on their jobs for their healthcare provision, the weaknesses of the American healthcare system are laid bare – how do you protect the population when so many of them cannot afford treatment? Is this an opportunity for the Democrats to ride their Medicare for All proposals all the way to the White House?
2 blog posts
Jonathan Calder is always good for a signpost towards something that will make you think. Mind you, he’s a pretty astute observer in his own right, but yesterday he was pointing us towards Neal Acherson’s review of the new book by Richard Norton-Taylor, “The State of Secrecy: Spies and the Media in Britain”. To understand how a state works is the first step towards changing it…
Matthew Green is too busy to come to the blog right now, so he’s published a guest post from John Medway, who thinks that the young have enough problems without adding the long-term effects of the coronavirus;
I must declare an interest here – I am elderly. To be fair to Glover, he doesn’t come down in favour of letting the elderly die off. He accepts an imperative to “throw the kitchen sink at the problem”. In any case, I’m going to leave aside the moral issue of balancing human lives against economic well-being. My view is that his prediction of long-lasting economic devastation from the coronavirus is simply bad economics. I don’t accept that we necessarily face years of austerity because of a generous approach to the temporary economic victims of the coronavirus.
So, we’ve made it to the end of the week. What do you think, is this feature worth continuing with?…
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31 Comments
“NHS to benefit from £13.4 billion debt write-off. Health Secretary announces over “.
Presumably that applies only to England and not to Scotland or Wales. Curious that NHS Wales, so often unfairly pilloried by the Tories, is performing better in this crisis than NHS England…. and that in Scotland the PFI inflicted by Blair on the Edinburgh Royal Infirmary for example gets no mention.
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Web results
Royal Infirmary of Edinburgh PFI Agreements – NHS Lothianorg.nhslothian.scot › KeyDocuments › pages › rie-pfi-agreements
Royal Infirmary of Edinburgh PFI Agreements. Type, Name. pdf, Bible of Land Contracts – Volume 1 (9Mb).
PFI scandal as Scottish NHS faces £10billion bill for hospitals …www.dailyrecord.co.uk › News › Scottish News › NHS Scotland…… 16 Apr 2017 – Edinburgh Royal Infirmary cost £180million to build but NHS Lothian will pay back £1.6billion by 2034
We’ll pay £1.2bn for PFI hospital but NEVER own it …www.scotsman.com › news › exclusive-well-pay-ps12bn-pfi-hospital-…
19 Jul 2010 – NHS Lothian’s director of finance Susan Goldsmith said: “The Royal Infirmary of Edinburgh building will remain the responsibility and be owned …
Scottish Government foots £1m bill for free parking at …www.edinburghnews.scotsman.com › Health › Coronavirus
6 days ago – And today the PFI firms like Consort, who run Edinburgh’s Royal Infirmary, were blasted for putting their own profits first at a time when the NHS …
When, and if, we ever get back to normalcy in UK politics there’s going to be one heck of a political legacy to sort out.
I’m no economist, ask my wife, but I’ve always been confused how one part of the government can owe another part an ever increasing debt…
So now a Tory government is writing off £13+ billion and promising ‘money is no object’…
BTW When, in 2015, Corbyn proposed that a Labour government to draw a line under the PFI deals of previous governments and, in addition, bail out hospital suffering such debt..
Is it only five years ago that such thoughts were ‘rabid socialism’ (and condemned, as such by many on here)..How time change ““Misery acquaints a man with strange bedfellows.”
Government money either comes directly from Tax Receipts, or indirectly from loans (bonds).
By writing off the debt, it has waived the accumulated overspend of the NHS. AIUI they are removing a constraint on a particular department, which has received a share of overall government finance. The obvious corollary is that this has to be balanced against cuts in other departments, tax increases, and/or increased borrowing.
@expats
I’ve always been confused how one part of the government can owe another part an ever increasing debt
I’m afraid that it is a consequence of what is called the ‘dead hand of the Treasury’. Sadly, that office of state (and remember that the PM’s formal title is First Lord of the Treasury) has almost always acted as a drag on change, so that it takes a crisis to force it to move. I am thankful that we have Sunak as Chancellor rather than Javid who always struck me as someone who was only interested in tax-cutting whatever the consequences for the economy. Had Blair and Brown understood MMT two decades ago, they would have known that there was never any need to use PPP to build new hospitals and schools; the only absolute requirement was to then raise taxes as and when required to prevent the extra money in the economy causing inflation.
Back in 2017, I reviewed Richard Murphy’s “The Joy of Tax’ for this web site. I still think that it is a good explanation of how taxation works: https://www.libdemvoice.org/review-of-the-joy-of-tax-by-richard-murphy-53361.html
@ expats,
“I’m no economist, ask my wife, but I’ve always been confused………”
Confusion, and, more generally, lack of understanding, is what many in government rely on. The concept of a PFI makes no sense at all. What was the point of forcing parts of the NHS to borrow money at exorbitant rates of interest when the Government can borrow for next to nothing?
There’s only a positive for anyone wanting to do the risk free lending at the same time as picking up a high rate of return. There needs to be a full investigation of corruption at the highest level which has to be the only possible motive behind PFI schemes. Those found to be guilty should serve serious jail time.
Peter Martin 3rd Apr ’20 – 11:40am…………. The concept of a PFI makes no sense at all. What was the point of forcing parts of the NHS to borrow money at exorbitant rates of interest when the Government can borrow for next to nothing?………….
That doesn’t stop with PFI….Most people in work ‘stick’ most of their salaries straight back into the economy making work for others who also pay tax…In 2010 ‘government borrowing’ at historical low rates, to keep the economy going, seemed to me a far better idea than ‘austerity’ by those who compared the UK to Venezuela …But then I’m ‘confused’…
@ expats,
“That doesn’t stop with PFI..”
Agreed but it’s a good start! If anyone doubts the scale of the problem they should read this Guardian article.
“NHS hospital trusts are being crippled by the private finance initiative and will have to make another £55bn in payments by the time the last contract ends in 2050, a report reveals.”
and:
“Some trusts are having to spend as much as one-sixth of their entire budget on repaying debts due as a result of the PFI scheme. PFI was introduced by John Major’s Conservative government but its use proliferated in the Blair era .”
This is the same NHS that millions of us are relying on, right now, to keep us from dying should we be unfortunate enough to be infected by the coronavirus. This goes right to the top. There’s no mystery about who is responsible for this. They should be fully investigated and subjected to the full force of the law.
https://www.theguardian.com/politics/2019/sep/12/nhs-hospital-trusts-to-pay-out-further-55bn-under-pfi-scheme
@ TCO
“Government money either comes directly from Tax Receipts, or indirectly from loans (bonds)……”
But where does it come from in the first place? Where does it come from before it is available to be collected as tax receipts or as a result of bond sales?
Peter Martin: “What was the point of forcing parts of the NHS to borrow money at exorbitant rates of interest when the Government can borrow for next to nothing?”
Let’s go back to the 1980s when Margaret Thatcher’s implementation of Monetarism dominated discussion about government borrowing. Government borrowing was bad but local authorities borrowing, to be paid back from revenue, was often OK. PFI developed from this and allowed New Labour to spend whilst pretending that debt had not increased.
The twist on PFI was that contractors used it to provide ‘rent-to-buy’ facilities for local government and the NHS. Under ‘rent-to-buy’, service operators paid for things which they did not control.
Paul Foot’s guide, PF Eye: An Idiot’s Guide to PFI, is worth a read.
https://www.private-eye.co.uk/special-reports/pf-eye
Why does a sovereign state borrow money to maintain itself and discharge its duty to its citizens and their children?
Why not issue its currency directly as President Lincoln did to win the U.S. Civil War?
https://www.globalresearch.ca/revive-lincoln-s-monetary-policy/13118
Might we discuss this as a possible party policy?
It is well enough the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
@ Steve,
“Why does a sovereign state borrow money to maintain itself and discharge its duty to its citizens and their children?”
It doesn’t. What we call Govt borrowing is simply a swap of one type of Govt IOU, ie bonds (gilts) which usually pay a small amount of interest, for another type of IOU, ie cash which doesn’t pay any interest at all. If it does it the other way around we call it QE. If Government wants lower longer term rates interest rates it does more QE and less “borrowing”. Conversely if it wants higher rates…..
Therefore the Govt bond market can be understood as primarily a means of controlling its monetary policy with respect to interest rates.
“Why not issue its currency directly as President Lincoln did to win the U.S. Civil War…..”
It already does. The introduction of the “Greenback” during the US civil war was primarily about taking the dollar off the Gold standard. It was considered an emergency measure at the time, and the Gold standard was later reinstated. Its been a long time since we’ve been on a Gold Standard per se. The last links to Gold were removed when the pound floated and at about the same time the dollar came off the Gold standard, for the last time, in the early 70s.
@ Phil,
Thank you for the Private Eye link. I used to know Paul Foot, albeit slightly, in the early 70s. He was a great investigative journalist, as this well researched article on PFI shows, and most of all a lovely man. He died at the relatively young age of 66. I often wish he was still around.
“If our nation can issue a money bond, it can issue money. The element that makes the bond good makes the money good also. The difference between the bond and the bill is that the bond lets investors gain from the transaction, whereas the currency pays nobody but those who contribute in some useful way”. [From T. Edison]
Why doe H.M.G. pay investors/money brokers to apply its monetary policy?
“Right after the Civil War there was considerable talk about reviving Lincoln’s brief experiment with the Constitutional monetary system. Had not the European money- trust intervened, it would no doubt have become an established institution.” [W. Cleon Skousen: Historian]
In 1971 Nixon ended the last link between gold, the dollar and sound money. Since when “currencies would float, easily manipulated by powerful insiders, hedge funds and the like.” [From E. Brown]
“It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before morning.” [H. Ford]
Mark,
that is a good guest post from John Medway who appears to have a well-informed view of both the current situation and longer-term challenges;
“It is, of course, tempting to think that governments can go on indefinitely financing their deficits through printing money. Some countries have done this, with disastrous results. The volume and speed at which money circulates needs to match the productive capacity of the economy or inflation results. As the economy recovers and nears its short-term limit, there may be a need to reduce rather than increase the money in circulation. This can be done by increasing interest rates, increasing taxes, reducing public expenditure or any combination of these. The important point here is that when printing money is an option, taxes are needed, not to pay for government expenditure, but to help keep the supply of money in the economy in line with productive capacity. In normal times, the notion that taxes are needed to “pay for” public expenditure is a useful approximation to the truth. But these are not normal times.
There are big things to worry about in the British economy. One is the age imbalance in the population and the problem of caring for a growing elderly population… The age imbalance is a problem in the real economy – the resources devoted to the care of elderly people. The problem is exacerbated by unfunded public-sector pension commitments, to which printing money will not be the answer.
More serious is the climate emergency. It is an emergency because global warming seems likely to prove catastrophic unless action is taken urgently to reduce carbon emissions… The medium-term economic and social effects of dealing effectively with the climate emergency are likely to be far-reaching – for good or ill, depending on the attitude and skill with which governments and societies approach the problem.”
Interesting take on where we are headed from the Keynes biographer Robert Sklidelsky https://www.prospectmagazine.co.uk/magazine/keynes-in-the-age-of-coronavirus-economy-recession-covid-19
“There are already signs of excess demand in certain retail sectors due to panic buying and interruption of wholesale supply chains. In the short run, this may be choked off by a combination of informal rationing, staying at home, and voluntary saving. But if the pandemic lasts for more than two or three months, we will be faced with the alternative, posed by Keynes in 1940, of reducing consumption by inflation or higher taxes.
Governments will be tempted to “pay for the war” by allowing prices to rise, but as Keynes pointed out this would be socially unjust. The correct alternative would be higher taxes on wealth and incomes. Further, in the spirit of Keynes’s 1940 proposal, part of the proceeds of the taxation could be earmarked for the payment of a basic citizens’ income as and when “peacetime” conditions returned.”
@ JoeB,
‘Governments will be tempted to “pay for the war” by allowing prices to rise’
Unless the Govt is borrowing in a foreign currency there won’t be any requirement to ‘pay for the war’. That’s not to say that pandemics and wars don’t do physical and economic harm. They obviously do. However the correct way to look at the problem is to say that our standard of living after ‘the war’, as always, will be determined by what we can produce at the time. There obviously isn’t going to be a requirement to send anything backwards or forwards in time.
Regardless of arguments about the social injustice of inflation, it is, as you say a mechanism for rationing what is available. It’s likely that we won’t just be able to press a reset button afterwards. After WW1 the government tried to do exactly this and put the UK back on a gold standard with the £ at its pre war parity. This was a big mistake. It led to recession, which meant we weren’t producing what we could have done. On top of this was a demand that workers cut their wages. Social strife resulted and we had a general strike in 1926.
We often hear that the price of a loaf was two old pence (or whatever) a 100 years ago whereas it’s a over a hundred times that now. The flip side of that is that takes a worker 10 minutes or so to earn enough for the loaf now whereas it would have taken at least an hour then. This is what matters to most people. This is not to say that we should allow rampant inflation, but even the neoliberals accept the idea of some inflation being a good thing with their 2% inflation target.
As the epidemic carries on and people realise that we’re not going to be free from this threat in a few months, we may all come to terms with the idea that existential disaster is possible, although, hopefully, we shall be saved by a vaccine. I think this will make it easier to persuade most people to change their habits to tackle climate change.
If we need to increase capacity to pay off the huge sums that governments are borrowing at the moment we need to switch to the production of environmentally desirable goods and services, not to carry on producing the same old rubbish that clogs our earth with the detritus of humanity.
Whatever the solution we must argue for social justice in the way this is repaid. Austerity has meant that our NHS isn’t properly prepared to deal with the crisis and that those who are now impoverished suffer more as economic activity almost grinds to a halt.
We must stand up for fairness and ensure that they do not suffer even more from the solution to the economic problems caused by the Corona virus. We need the economists in our party to form a working group now to develop a solution that will work both economically and socially as Keynes did for the Great Depression.
Peter Martin,
I agree that productivity determines international competitiveness and the terms of trade i.e. the volume of imports that can be acquired in exchange for British made goods and/or sale of assets.
The Geddes Axe of 1922 was driven by the treasury view that any increase in government spending necessarily crowds out an equal amount of private spending or investment, and thus has no net impact on economic activity. It is derived from the GDP equation and says that, as a matter of accounting, government spending must come from somewhere, and thus has no net impact on aggregate demand, unemployment, or income.
Like all economic analyses based on accounting identities, this commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship. Keynes’s focus was on fiscal stimulus to revive ‘animal spirits’ i.e. not substituting government spending for entrepreneurial activity, but stimulating demand.
Fiscal stimulus acts primarily on a specific short-term component of investment spending by firms – inventory build-up- rather than longer-term additions to the capital stock. The stimulus acts to reduce inventories and encourages firms to resume production levels and retain or rehire workers.
Ultimately monetary and fiscal stimulus are short-term measures aimed at mitigating the effects of an economic shock. Money has to circulate and production of goods and services need to be maintained in a circular economy. We all need to be able to earn and spend. If too many cannot the circular economy breaks down.
Conversely, the UK is not a closed economy. Savings can be and are invested abroad. While the paradox of thrift may hold at the global level, it need not hold at the national level.
Full-employment is a public good in its own right and a necessary element of a healthy economy. To deliver that we need policies that promote that objective. International competitiveness; stable money that can serve as a store of value; job guarantees to underpin full-employment, address long-term unemployment and act as an automatic stabiliser; affordable food, housing and utilities; efficient and accessible public services and a social security safety net that provides support during periods of unemploymnt and/or ill health.
@ JoeB,
“……productivity determines international competitiveness”
I didn’t quite say that. I said it’s what we produce in total. Though obviously the more productive we all are the higher that production will be. But high productivity doesn’t just happen. It’s always driven by demand. There has to be a demand for the production for it to happen in the first place. There was an item on TV the other day about a company making hand gel. They’d recently increased their production by a 500% or so using their existing facilities. Possibly they’d taken on some extra staff and there would have been overtime working but I doubt it would have been five times more. So why didn’t they do all this before? Simply because there was insufficient demand previously.
“Ultimately monetary and fiscal stimulus are short-term measures…..”
This is just an unsubstantiated statement. The underlying assumption is that the economy is essentially a self stabilising structure which might just need a little correction now and again to help it recover from a large external shock. But what if it isn’t? Suppose it’s inherently unstable and needs lots of control to keep it doing what we want it to do.
Not all shocks are like this one with easily identifiable causes. The 2008 crash was foreseeable to all except most professional economists. So it can’t have been that easy for them!
” Savings can be and are invested abroad.”
So what? If there’s a deficit in the capital account there would have to be, penny for penny, a surplus in the current account. Most people who think along the same lines as yourself would say that was a good thing. I’m agnostic about all that. It really doesn’t matter providing the Govt is concentrating on balancing the economy as a whole rather than trying to balance some inconsequential part of it.
Peter Martin,
“I’m agnostic about all that.” That’s why you would never be entrusted with the responsibility for managing an economy.
Here is someone who is not agnostic https://www.newstatesman.com/politics/economy/2020/03/coronavirus-crisis-economic-collapse-capitalism
Whether you agree with his analysis and radical prescriptions or not at least he gets what is happening and the impact of a run on sterling and capital outflows:
“When it comes to the economic rescue package, doing “whatever it takes” means borrowing what it takes and, if necessary, the Bank of England printing money to buy up the debts of the government, banks, households and corporations.
This would leave the national debt at more than 100 per cent of GDP and the monetisation of this debt by the Bank would, traditionally, risk triggering a run on sterling and capital outflows. If this happens, then, as in wartime, there is another traditional remedy – capital controls.
Like it or not, we are going to end up with a heavily state-backed economy, with the government directing the private sector and ensuring everyone has enough to live on.”
Joe B,
Entrusted by whom? The democratic requirement is that we have an economy that works in the interests of all. “Works” means it doesn’t crash for no apparent reason. Generally speaking, we engineers understand that it is a mistake to assume that any system is automatically self correcting. That’s why you can board a plane with the reasonable expectation that if a problem arises it will be corrected at an early stage rather than just left to correct itself with an inevitable later panic when that’s seen not to happen. This way the plane, and yourself, is much less likely to come to any harm.
I would hope that the younger generation of economists do start thinking more along scientific and engineering lines. This means that they fit their models to what they see happen in reality rather than expecting reality to conform to preconceived notions.
I’m not sure if you’d class Paul Mason as an agnostic or an atheist! But he’s certainly not a believer in your brand of economics. Where he gets it all wrong, though, is in his comparison of Covid 19 to the Black Death which is clearly way over the top. If we have 100 people living on an island and one of them dies from a previously unknown disease we’d say it was unfortunate but we wouldn’t assume that the remaining 99 islanders were going to have to completely revamp their way of life.
In our case 1% will be around 650,000 people dead in the UK. That’s a potentially big problem and why we’re all in lockdown. But it’s not the Black Death which would mean 20 million deaths.
Peter Martin,
the economy is a euphemism for the collective commercial activity that firms, workers consumers and the state of behalf of households engage in. It is measured in monetary terms. The economic system in the UK and most developed economies have built-in automatic stabilisers that alleviate the need or benefit for discretionary fiscal or monetary stimulus outside of large economic shocks. Such stimulus is always short-term.
The government’s primary role in economic management is the maintenance of stability in the pricing and availability of essential services; employment, exchange rates and financial markets.
In carrying out that function a government has a responsibility to the population as a whole including business, employees, pensioners, families and their children. A responsible government seeks to equitably balance the interests and competing claims of various sections of society.
I don’t have a brand of economics and give equal weight to Keynes or Hayek based on empirical evidence. I do bring a skeptical mind to claims such as International trade balances or monetisation of debt don’t matter. Inflation of imported food and raw materials arising as a result of a depreciating currency has always mattered and always will. So too does the squeezing down of incomes of those living in fixed incomes whether it be by the absence of interest earnings on savings, the inability of pension funds to maintain the value of investments and pay pensions or the effect of inflation on those living on fixed pensions.
It is good that you recognise that your estimate of 650,000 people dead in the UK is a potentially big problem. For context, WW1 saw 880,000 British forces killed. In WWII there were 384,000 soldiers killed in combat and 70,000 civilian deaths.
@ Joe B,
Yes the automatic stabilisers alleviate the need for fiscal, and to a lesser extent, monetary intervention but alleviation isn’t the same thing as elimination. There’s a continual need for Govt to control the economy in a sensible fashion. Putting the economy on to automatic pilot may be OK for a short time but why assume that the economy is self regulating when there is no need to?
Having said that, the automatic pilot is probably better than a bad pilot. When the Govt’s deficit hit 11% after GFC it would have been better to just accept the workings of the automatic stabiliser. Fighting the stabiliser by imposing cuts and increasing taxes was the most stupid of choices.
“I do bring a skeptical mind to claims such as International trade balances or the monetisation of debt don’t matter”
The mainstream view is that international trade balances don’t matter. It’s been a long time since the trade figures have been included in the news. On the other hand the mainstream view is that the Govt’s deficits do matter. This is where the contradiction arises. It can make sense to say neither matters or that both matter. It doesn’t make any sense to say that only one matters.
Incidentally the 650,000 figure isn’t a prediction of the eventual COVID-19 death toll . It’s approx 1% of the population and a worst case scenario. I’d be optimistic that it won’t be anywhere near that.
Peter Martin,
the balance of trade may not make the headlines in the sporting life, but a fall in the sterling exchange rate certainly does make headline news and wider coverage and analysis is available the Financial press https://www.ft.com/content/ace751a2-fbd6-11e9-a354-36acbbb0d9b6
“Suren Thiru, head of economics at British Chambers of Commerce, said the widening current account deficit “leaves the UK more exposed to sudden shifts in the economic conditions, including a disorderly departure from the EU”.
“The UK’s large current account deficit has been financed by substantial foreign capital inflows over recent years which “makes the UK vulnerable to a reduction in foreign investor appetite for UK assets”, the Bank of England warned in the summer.
“Such a drop-off in investor appetite could be triggered by perceptions of weaker or more uncertain long-term UK growth prospects, which could drive up yields on assets in order to maintain foreign investors’ demand.”
Government deficits do impact on the terms of trade and exchange rates. It is what they are being spent on that matters. If its to finance investment in infrastructure that’s a positive. If its to shore up over-consumption then they certainly do matter. As the Al Jazeera report writes https://www.aljazeera.com/programmes/countingthecost/2020/03/pandemic-proves-world-reserve-currency-200328113954984.html “Pandemic proves there is only one world reserve currency”.
“Emerging markets have borne the brunt of the rush for dollars. Indonesia’s rupiah lost almost 14 percent of its value since the beginning of the year. The Russian rouble and Mexican peso have lost a fifth of their value.”
“The problem for emerging markets is that they may want to cut interest rates to stimulate economies hit by the coronavirus, but that would undermine their currencies further. And interest payments on dollar-denominated debts has just soared, unbalancing finances.”
“The sterling fell more than 10 percent, a level last seen in 1985. The United Kingdom’s divorce from the European Union has broken the resilience of the pound, which was considered to be tethered to the fortunes of the continent.”
“The best performing currency just happens to be the Argentine peso – best performing in the sense that it has fallen the least compared with other Latin American nations. The fact that it has introduced capital controls, limits to money flowing out of the country to tackle an economic crisis, has certainly helped.”
@ Joe B,
“The UK’s large current account deficit has been financed by substantial foreign capital inflows over recent years”
Presumably you’re quoting the BoE with some approval? Previously you’ve said:
“one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship.”
Correct me if I’m wrong, but you’re saying that the UK chooses to run a current account deficit and we then have to look for an inflow of foreign capital to finance it? Isn’t this “interpreting an accounting identity as a behavioral relationship” too?
What if the inflow of foreign capital forces causes us to have a a current account deficit? We do know that the two have to sum to zero.
The City of London’s role as an international financial centre means the UK will always have a large stock of outstanding liabilities to overseas residents. That leaves it vulnerable to a decline in foreign investor sentiment https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-paper/2013/the-role-of-external-balance-sheets-in-the-financial-crisis
Around 30% of UK government bonds and half of the stock of equities and corporate bonds are owned by foreign investors. An extreme reversal of attitudes to the UK– so that foreigners not only stop investing in the UK, but sell off their existing holdings – would clearly have large effects on UK asset prices.
Stock markets in London and Europe have fallen by 25% in value over the past weeks and months whereas US stock markets have rallied even in the face of huge job losses there.
To some degree capital flight from the UK is offset by revaluation effects i.e, higher value of UK investments in US markets. Just as lower oil prices will temper the inflationary effects of depreciation of sterling, so too do capital and currency gains on overseas investments.
Foreign investor sentiment is a behavioural relationship not an accounting identity. When there is a flight to safety the principal concern for investors is liquidity and preservation of capital rather than investment returns. Investments in currencies that have a long record of containing inflation and preserving capital value- US Dollar, Euro, Japanese Yen, Swiss Franc and hitherto the British pound – are the traditional safe havens.
If the UK gives up that stability as a safe haven, it will face similar constraints to those of emerging market countries in keeping interest rates low in the face of a declining exchange rate and large capital outflows to stronger economies.
@ JoeB,
On the one hand you’re saying its a good thing that there is an inflow of capital but on the other hand you also think it’s not such a good thing because it causes us to worry that it might stop or even reverse.
These kinds of contradictions are typical of what passes for mainstream economic thought. The ideal economy for many is one which runs an export surplus, has a steady and large inflow of foreign capital, with a pound is a lot higher than it currently is, the national savings of the private domestic sector is positive, and the government runs a surplus in its budget.
There aren’t many people who know this is impossible even though its not difficult to understand why.
We should just concentrate on steering a sensible mid path between having too much inflation and too much recession. At the same time we stop worrying about the bond vigilantes! There’s plenty of countries which manage perfectly well without relying on their supposed kindness! All the big net exporters don’t want influxes of foreign capital for obvious reasons.
Peter Martin,
it seems to me the contradictions are only in your head and not with the analysts at the Bank of England.
The financial and business services sector is a highly important part of the UK economy. That involves intermediating the investment of large volumes of international capital from across the world. When that private capital is withdrawn and allocated elsewhere it forces up government borrowing to compensate for current account deficits and starts to push up the cost of imported goods.
A stable economy is one in which people can provide for their current needs and plan for the future including saving for retirement in the knowledge that the money they put aside will have some value in old age. When government economic policy is based on currency depreciation, inflating away accumulated debt and driving interest rates close to zero, it makes it largely impossible to save in the domestic currency for the future and for people to provide for themselves.
An undervalued pound means we are paying more for imports or overseas investments than we need be and selling assets or borrowing more than is necessary. As the Forex article concludes https://thelazytrader.com/articles/learn-to-trade/is-the-pound-undervalued-due-to-politics/
” UK companies are delaying investment and foreign companies are choosing to invest elsewhere, as a result it is normal that the pound has become undervalued. Quite simply, if you’re not popular, you’re not valued… and few foreign investors have been keen on the UK, let alone investing in it over the past few years.”
” When government economic policy is based on currency depreciation…”
You keep suggesting that I’m advocating such a policy. Yet the Government sets a 2% target for inflation which I really had nothing to do with! However, I think it is sort of OK but I would agree it does need more discussion than it gets. If the choice is between recession and a small amount of inflation I’d go for the latter. At one time, the ownership of gold wasn’t allowed. It is now. The most convenient way is to own gold certificates. Therefore if anyone doesn’t trust the world’s fiat currencies, which I think is all of them, when saving for retirement, they do have the option of putting their own personal savings back on to a gold standard.
There’s always a range of opinion on what the “correct” level should be for the currency. No doubt the “financial and business sector” would like it to be as high as possible. This sector is located in London and the SE and has done a good job for itself in making the argument to Govt that it is more than just “highly important”. The entire UK economy has been seen to rely on it.
The alternative view is that the tail should not be allowed to wag the dog. The financial sector should exist to serve the needs of the wider economy. This it has clearly failed to do. The high pound being a major cause of the decline in UK manufacturing. In the early part of the 00s it was a major cause of industry closure. This caused two own goals on the part of the pro EU neoliberal UK establishment. Firstly, in 2003 even they realised the pound was too high to join the euro which was the main reason it didn’t happen. Later, the loss of much of UK manufacturing industry created much resentment in the regions. There was then a backlash against the establishment which resulted in you-know-what!