Trade Friction and free movement.

I co-authored this, published at Brexit Spotlight by Another Europe.

It is little wonder then that the Conservatives are under acute pressure to revise their trading arrangements with the EU in order to re-open access the European single market. But it seems likely that – at least for the time being – Brexit ideology will not allow any serious recognition of the economic reality.    …

Trebles all round!

Trebles all round!

This week, the Labour front bench, in a trinity of acts, supported the autumn statement and thus austerity in principle, criticised Tory immigration policy on the grounds of competence and repeated their promise to not join the EU, its single market, or adopt the EU’s freedom of movement in the next parliament (if they win).

The inconvenient truth is that the UK economy needs unskilled EU workers to do the work, It’s not the net fiscal impact that’s the issue. We have a massive labour shortage, we need migrants to do the work, it’s about the output. It’s not all highly skilled work as we define it either, it’s hospitality, agriculture, and health care. And today we define highly skilled as highly paid; even if only the highly skilled were desirable, they are not synonymous.

I have thought long and hard to find a way of compromising with those who want to pander to racists on free movement, and I can’t find a way of doing it while solving both the macro-economic problems and remaining true to our internationalist principles. All this “control immigration” or a fair “points based” immigration policy which involves stopping people is just pandering to racism.

Differentiating from the Tories on competence is morally vacant.

Accepting the debt fetishism at the heart of the Tories “New Economic Policy” is also morally vacant, and self defeating, you can’t cut your way to growth and austerity causes poverty, homelessness and is killing the NHS. Labour’s next manifesto and government must offer hope. They will lose votes from Corbyn’s voting coalition, and as far as I can see it’s deliberate.

You’d think they’d learn that voters always have somewhere else to go! Some demographics, historically Labour voters, are choosing to vote Tory.  …

Where’s prudence gone?

Where’s prudence gone?

While reading Simmon Hannah’s “A party with socialists in it”, I made a note to talk about Corbynism and Modern  Monetary Theory. I am writing an omnibus, review of that book, but think that a further note on MMT and its role in Corbynism, and the insights and weaknesses it brings to today's crisis might be appropriate. In 2015, Corbyn flirted with MMT but by 2017, McDonnel, Meadway and Wren Lewis had won control of the Party’s economic agenda. The rest of this article looks at the bond market disruptions, FX and the balance of trade, the threat to pension funds, and the extent to which MMT has some useful insights. For more, check out overleaf behind the "Read More" button. ...

Crisis, what crisis!

Crisis, what crisis!

Some aspects of this are hard to understand, here's my attempt. The UK has been in a balance of trade deficit for decades. For most countries it is the main factor in determining foreign exchange rate between sterling (GBP) and other currencies. In the case of the UK, there is significant additional incoming flows buying sterling quoted stocks, bonds and gilts. Sterling has been falling ever since Brexit, in my mind as a result of a drop in confidence due to Brexit and the growing relevance of the balance of payments deficit; the fear of inflation has added to that recently. This article looks at the history of bond prices and interest rates and warns that increasing interest rates may cause mortgage defaults. I conclude, "A triple whammy of inflation, pension losses, and mortgage payment increases, suddenly the UK seems a lot poorer than it was. " The full article and diagrams can be seen overleaf ...

Promises from Rachel Reeves

Promises from Rachel Reeves

Conference was addressed then by Rachel Reeves, the Shadow Chancellor. ( video | text ). I have used diigo to mark out the exciting quotes from the text. The rest of this post is from my contemporaneous notes.

She started by promising to be Britain’s first green chancellor and promises net zero carbon for electricity by 2030. She promises a real living minimum wage, resurrecting NEDC, where Govt, business and the unions can talk about the economy. She promises that business subsidies will be training focused, business rates are to be abolished to allow the high street to compete with their online competitors, although I wonder where local authority income will come from.

She promised a new sovereign wealth fund, forty years too late, but that’s not her fault.

She spoke of responsible finance, and I add that while I wasn’t so concerned last week, a stricter approach may be needed now that the debt to GDP is nearing 150%. We all need to remember that only growth can reduce debt, but she did promise “No return to austerity”.

She finished the speech with a full and comprehensive promise to invest in NHS jobs, to which I say good, but ask who’s going to do them; many of the vacancies are Brexit related as nurses, cleaners, doctors and research scientists have gone home to Europe and won’t return until the hostile environment is repealed.

She briefly mentioned the plan to ‘Fix Brexit’, which gives me the excuse to repeat or preview that on immigration and labour supply, they have a cakeist view, but left hanging is that she recognised our loss of competitive advantage in science and bioscience, underling the urgency with which we have to rejoin Horizon Europe.

She was silent on currency, and some may consider the plan a version of autarky. It’s a bit hard to judge from a 35 minute speech. …

On the Economy

On the Economy

The bulk of motions on the economy were tabled by Unions, and focused on wages, infrastructure and working rights. Several of the Union motions call for renationalisation of the basic utilities, mail and rail, but not gas or water. I wrote a speech but wasn’t called. This is sort of what I planned to say.

“We are in an economic crisis, a crisis of living standards and possibly the first one caused by a government since the discovery of … Keynesianism.

Reinforced by Brexit, we have declining inward investment, the highest inflation in a decade, imports are up, exports catastrophically down, we have a possibly unsustainable balance of payments deficit again, it’s been in deficit for decades and a labour shortage impacting agriculture, social care, and the NHS and also stagnating wages.

The currency is taking a fall due to confidence, this increases the price of energy and food.

My dad, once said to me, that, “governments take thousands of decisions every day and under the Tories everyone is wrong”. it is not enough to seek to get only some of these decisions right, to compete with this ERG government on the basis of competence allied to debt fetishism. We need to offer hope and then deliver on that promise.

One thing that Kier Starmer has right is the growing anger that hard work is not enough to allow an even reasonable standard of living. it is a struggle to pay for rent or a mortgage and heat one’s home and even, although I hate the phrase put food on the table. We must offer people hope of a better economy and society.

I finish by saying this is a crisis caused by this Brexit government and planning to fix it neither offers hope nor is truthful.

Flirting with monetarism and offering little hope on even trade friction with the European Union jeopardises the loyalty of many of those who voted for us in 2017 & 2019.

Dave Levy, from my notes

Apart from the attempt to fix Brexit, I think we’ll offer more than I had feared. …

A short note on FX & UK Trade

A short note on FX & UK Trade

Like many, I am considering the macro drivers of the cost of living crisis and I listened to the AEIP podcast with Gary Stevenson. He has an interesting view and argues that the QE funded furlough scheme was in fact a subsidy to the rich and that the fundamental imbalance in the country is the shift of wealth from poor to rich. It’s a version of the argument that the problem is insufficient demand being caused by the continued pressure on medium and low incomes.

He also argues that the massive QE efforts are an effective devaluation which given the relative stickiness of prices with wages being the slowest to change and everything that wages need to buy increasing will exacerbate the squeeze on spending. He also argues that given the choice between working and starving, people will work. The use of the word devaluation led me to look at the following charts

GBP:USD FX from Google Finance

The pound has been falling against the dollar all year, this makes imports, particularly of Oil, but also of Gas and food more expensive.

Balance of Trade: GBP millions

Here we see the balance of trade figures, a more traditional cause of devaluations. With the exception of two months, the UK has been in deficit for the last five years. There are those who contest the the balance of trade causes currency price movements and Sterling in particular is impacted by speculative currency flows. The key drivers of speculation are expected rate of return, which for fixed income assets is driven by the bank rate, and animal spirits about which I think it best not to comment.  …

Inflation

Inflation

The Bank of England was made ‘independent’ of the Treasury in 1997, although not really, so that it could take the blame for any decisions to increase interest rates, such as those taken earlier this week (£) when the Bank increased bank rate to fight inflation.

How does that work? Inflation is believed to have one of two causes, one is that there is too much demand, chasing too few goods and consumers bid up prices. The other is that import prices are rising and thus have an impact on the domestic price level. These are known as demand-pull, or cost push. The current inflation would seem to be caused by the increase in the cost of imports especially primary energy products, exacerbated by a fall in the exchange rate.

The monetarist theory is that there is a real world and money view of the economy.

i.e.

Prices x Product = Money Supply x Velocity of Money

PQ = Mv

This equation is derived via definitions and algebra and thus there is no proof of causality. Monetarists say that reducing the money supply will reduce prices. This assumes that in the short term both the velocity of money and the amount of product are static. Recent econometric studies suggest that the velocity is not constant, and there has always been a problem of defining what money supply is as it must include some credit and so is very difficult to constrain. We should note that consumer credit can be increased very rapidly so can no longer be consider static.

There can be no doubt from studying economic history, that increasing interest rates to reduce the money supply causes a recession, unemployment and poverty. It’s also highly likely that unionised workers will demand higher wages to defend their living standards. In a world where business is internationally mobile, business will defend its profits by increasing prices and/or off shoring the work; this is the wage-price spiral where an economy has high inflation, both cost push and demand pull and low growth.

The drivers of growth and/or the floor to a recession are investment, exports or government expenditure, especially benefits. Increasing interest rates makes investment and the national debt more expensive. It makes exports cheaper in their foreign markets but of course the big factor in the export price uplift is Brexit. Higher interest rates increases the income on savings and the expense on business and domestic borrowing. A squeeze on profits will cause capital to go overseas, especially if the exchange rate is high although this may be ameliorate by the increasing yield in bonds. The other cause of the economic malaise is the poor investment rates by both the private and public sector in the UK.

There can be no doubt that increasing interest rates will cause unemployment. This is how it reduces demand.

The other option to monetary policy is product supply, direct investment such as the EU’s Horizon Europe programme or price regulation to cause a profit squeeze, tax the energy companies and banks, build more houses, control profits, transfer income from the wealthy to  the poor because the poor spend more of their income and of course rejoining the EU’s single market to reduce both import and export frictional costs.

High interest rates are a choice, a choice of theory and a choice of policy. The inconvenient truth is no-one knows if it works.

ooOOOoo

I conclude with some links to key commentators, professional economists. David Blanchflower, writes in the New Statesman, “The Bank of England is recklessly driving the UK into a deep recession”, he warns of the threat of unemployment, elsewhere on his twitter feed he is highly critical of the Bank and its Governor, Andrew Bailey, He is also quoted in a video clip by C4 on twitter, stating that unemployment hurts people more than inflation, which can be seen to be a declining threat. Anne Petifor exposes the role of the global capital markets in ‘managing’ food and energy costs, Richard Murphy provides a modern monetary critique of the theories. I particularly like his calling out of the role of import prices and speculators,

There is a third reason why the BoE policy will not work. It’s not just the assumption that people have too much to spend that the BoE get wrong. They have actually totally failed to identify the proper cause of this inflation.

The inflation we’re suffering is the result of shortages of oil, gas, fertiliser and food, in the main. Some of these are real (food, in particular). Others are being stoked by speculators who are profiting from them, which is why oil companies are declaring such big profits now

Richard Murphy – On Twitter

The featured image has been taken from Blanchflower’s New Statesman article where he asserts its a BoE MPC authored chart. This I assume can e used under the OGL license.  …

Labour’s macro-economics, “Back to the Future”

Labour’s macro-economics, “Back to the Future”

Starmer made another speech on economics on Monday 25th July. It is reported in the Guardian.

Starmer has been trying to pitch Labour as the party of fiscal prudence and will say: “With me and with Rachel Reeves [the shadow chancellor], you will always get sound finances; careful spending; strong, secure and fair growth. There will be no magic-money-tree economics with us.”

From the Guardian,

This article looks at growth and debt, Starmer and Reeves flirtation with Osbornomics and Reeves' rejection of nationalisation on the grounds of cost, I note countervailing views from Murray and Long Bailey and note that Reeves places herself in the sad queue of shadow chancellors undermining Labour's election chances by 'telling the truth'. There's more overleaf ...