If I were George Osborne...

George Osborne says we are in danger “of having a proper sterling collapse, a run on the pound.”
If I were he, I would not have said this. If we get a genuine run on the pound, Osborne will win even if he had not made this remark, as the fall will reflect discredit upon Labour’s economic record. But now, if we don’t get such a run, Osborne will be accused of being an immature hysteric with no grasp of economics.
So his comment doesn’t make sense in cost-benefit terms.
Instead, if I were he, I’d make two different points.
1. The current weakness in the pound shows that the market doesn’t expect Brown’s fiscal stimulus to work.
Put it this way. There are loads of examples of increased government borrowing being associated with a stronger exchange rate. Most famously, the Reagan deficits of the early 80s saw the dollar boom. There’s a simple reason for this. If markets expect looser fiscal policy to boost economic growth, they’ll expect higher short-term interest rates and a stronger demand for money, which are good for currencies.
That sterling’s so weak - and the market expects low short-term rates even in late 2010 - suggests therefore that it doesn’t expect the economy to gain a boost from Brown’s fiscal policy.
It’s in this context that the Tory charge that Brown failed to fix the roof in sunny days makes sense. Public borrowing is so big that any tax cut or spending rise can only be temporary. And because everyone knows this, there’s a danger that they will respond to the fiscal stimulus by saving more in anticipation of future tax rises or spending cuts, in which case the stimulus will fail.
2. The days when governments could get away with borrowing heavily are coming to an end. In recent years, there has been heavy demand for gilts from overseas, as the Chinese have looked for places to invest their surplus savings, and oil exporters have invested their revenues.
But this buying is already slowing down. And it could continue to do so. As the Chinese government budget slips from surplus to deficit, it will absorb some domestic savings. And lower oil prices will give middle eastern countries less to invest.
So although we’ve been able to borrow cheaply recently, we might not be able to continue to do so - especially if/when investors risk appetite returns and they sell safer assets such as government bonds.
In this sense, Brown’s borrowing is indeed irresponsible, as it leaves future generations exposed to the risk of having to pay higher borrowing costs.
These allegations are arguable. But they make more sense than forecasts of a sterling crash.

Comments

[Kit]

"So his comment doesn’t make sense in cost-benefit terms."

You are confusing his needs with those of the Tory Party's. You are right that it makes sense for him to remain quiet for the Party's sake but as his position is under threat he needs to play politics.

[Bob B]

Chris, you've not mentioned another reason for the current weakness of Sterling in the foreign exchange markets: the UK's hefty deficit on its current balance of payments - amounting to 3.1% of the UK's GDP in 2008:
http://www.economist.com/markets/indicators/displaystory.cfm?story_id=12607146

Capital inflows propped up the Sterling exchange rate but with the recent cut in base interest rates by the BoE and with interest rates expected to stay low because inflation, as measured by the CPI, expected to fall below the BoE's target of 2%, there are more renumerative havens to stash away mobile international capital. Hopefully, weaker Sterling will improve the UK's current balance of payments and that will provide some stimulus to the economy.

I agree that tax cuts are unlikely to provide much of a stimulus for the reasons you cite. If bank lending also remains cautious, we are in for a long recession. The challenging policy issue in then whether the government should raise public spending to boost the economy.

[Planeshift]

"Public borrowing is so big that any tax cut or spending rise can only be temporary. And because everyone knows this. And because everyone knows this..."

I think its questionable how many people actually do know this.

So to make the stimulus work the logical thing to do is provide the extra money to those who don't know that the tax cuts and spending increases can only be temporary. In other words tax cuts should only be offered to those people who have no interest in economics.

[passer by]

Does not an opposition party have a constitutional obligation to spell out the risks to the wider public regardless of what their chosen policy is or would be? A bit like the bottom of the advertisement "your home may be at risk" ect

As I seem to remember the labour party were against many things the the then Tory government enacted, only to change in government, and made their feelings known loudly, joining ERM for one.

Few remember they wished to join it at a much higher rate, and they were very unwilling to show up to be counted on the day of reckoning, golden Wednesday.

Its interesting to see Brown has made sure the Chinese are in on the deal to make sure the bond market does not go south.

http://news.bbc.co.uk/1/hi/world/asia-pacific/7730774.stm

[dearieme]

Were I he, I'd just keep reciting "Broon and bust".

[Bob B]

According to this blogging by Suzanne Moore on the Daily Mail online:

" . . . Osborne, it is said, will stay as Shadow Chancellor but a demotion of sorts has taken place. He is going to go away and think about what to do about the economy for four months. By the time he tells us, will anyone be listening?"
http://www.dailymail.co.uk/news/article-1086132/SUZANNE-MOORE-A-toff-like-George-Osborne-use-cupboards-bare.html#comments

But then:

"The businessman Lord kalms who is a major financial supporter of the Conservatives called this morning for Osborne to be replaced."
http://blogs.news.sky.com/boultonandco/Post:90031e70-5a06-4a51-9683-25243e366af1

[Alex]

In the light of the J-curve effect, it makes a lot of sense for Gideon to talk down cable. A sharp fall in sterling would have very short term deflationary effects and rather longer term reflationary effects. He's hoping that the quid tanks, Brown gets the pain, he gets into office...and then comes the benefit.

Note further that the pain would be concentrated geographically in financial SE/London marginals, the benefit in West Midlands and Northern industrial seats and maybe the M3-M4-M11 new town techie belt.

Then, Osborne has just staked his career on a forex trade three weeks after making Nathan Rothschild his enemy, so you can't attribute too much intelligence to the man.

[Bob B]

Among George's main problems IMO is not so much a lack of intelligence as having a natural disregard for the hoi polloi and because he's not a trained economist - unlike Vince Cable, whom the media keep interviewing. The result is that he's dependent on Conservative Big Beasts, trawling around for expert professional advice and for whatever he can pickup from the likes of Conservative Home, which doesn't exactly encourage informed, open debate.

FWIW my impression is not that GB has clearly outplayed the Conservatives but rather that the Conservatives have shot themselves in the foot. As a leader in last Wednesday's FT put it:

"Although the opposition Conservatives show they understand the need for a plan to repair the public finances, their short-term proposals for dealing with the downturn are paltry. Should the government go ahead with a fiscal stimulus at the pre-Budget report, expected this month, it must do better."
http://www.ft.com/cms/s/0/db19e6d4-b029-11dd-a795-0000779fd18c.html

[Mark Thyme]

Chris, are we in danger of a sterling crisis, or are we in one? The pound has dropped almost as much during the past month as it did during the 1992 ERM crisis. What's more, the pound has fallen more from its 2007 highs than it did in the couple of years around 1992.

And the kicker is that we're worse placed to benefit from a weaker pound this time round. The manufacturing sector is an even smaller part of the economy than it was then and services exports (mostly City related stuff) is dying a death. Besides, with demand falling everywhere, who's going to want to buy British exports?

In the decades to come Brown will be reviled as the Richard III of our era.

Mark Thyme

[Bob B]

Isn't it a foreseeable outcome of the cuts in interest rates by the BoE that the Pound would fall in the foreign exchange markets as mobile international capital seeks havens with higher returns and stronger currencies? And if interest rates in Britain are expected to stay relatively low for some time because of a long recession here, there's not much incentive to switch back into holding Pounds.

Again FWIW, this discussion of the array of policy options for easing the recession and getting economies expanding again in The Economist of 30 October is fairly comprehensive, balanced and illuminating IMO:
http://www.economist.com/displaystory.cfm?story_id=12510859

It brings out clearly the limits of relying on interest rates alone to boost economies out of recession. Whatever the personal position of readers, the piece is worth reading but it's over three pages long. There's much to discuss.

I've been clear that I regard GB as partly to blame for where we are by allowing the house-price bubble to continue growing and the mountain of consumer debt (£1.4 trillion) to build. These are sure indications that interest rates were held too low for too long as a result of GB changing the BoE's inflation target in December 2003 - against the advice of the BoE - from the old RPIX, which includes house prices, to the CPI, which doesn't.

Economists were warning about the house-price bubble years ago. Credit where it's due. Charles Goodhart was warning about the house-price bubble in Britain back in 2002:

"CHARLES GOODHART, a former member of the Bank of England's monetary policy committee, warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

"His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . "
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

The government chose to ignor the warnings - house-price bubbles tend to be popular with home-owners.

[Bob B]

The extent of the recent slide in Sterling against the US Dollar since June 2008 can be seen in the graph here:
http://news.bbc.co.uk/1/hi/business/7727399.stm

[Bob B]

Hot news update:

"Britain came under international pressure yesterday to inject billions of pounds into the economy as the Chancellor, Alistair Darling, finalised plans for tax cuts and public spending of about £15 billion using money from NHS surpluses. The details will be in the Pre-Budget Report next week.

"Dominique Strauss-Kahn, managing director of the International Monetary Fund, called on nations to pump in 2 per cent of their gross domestic product (GDP) in an attempt to stave off a severe global recession. . "
http://business.timesonline.co.uk/tol/business/economics/article5168725.ece

Note the intention to divert "NHS surpluses" when the NHS claims to be short of funds for expensive drugs and mental health:

From 6 June 2008:

"The government has come under fire after figures showed a £1.658bn surplus in the NHS last year. . . "
http://news.bbc.co.uk/1/hi/health/7440519.stm

[michael, Islington]

The economics on this posting is abysmal.

Anybody who really wants to understand what's going on is strongly suggested to take at look at Maverecon on FT.com.

Professor Buiter is standing on Mount Olympus. You lot have your heads up your bums.

[Bob B]

That abuse is impressive.

Even more impressive would be reasoned criticism.

[Bob B]

Do try this from Monday's FT:

"To judge purely from Sunday’s newspapers, George Osborne’s weekend fight-back against Labour and internal Tory attacks on his economic policy backfired spectacularly."
http://www.ft.com/cms/s/0/bf051d6a-b434-11dd-8e35-0000779fd18c.html

I see that Professor Buiter is saying - among other things - that Britain should put the Pound back into the European Exchange Rate Mechanism and the Bank of England should be charged with a remit to target the exchange rate and not inflation.

Wasn't that what Nigel Lawson as Chancellor was effectively doing from 1983-89?

The outcome by the end was the unsustainable Lawson boom of the late 1980s which brought resurgent inflation. Try this:

"In the second quarter of 1989, the rapid increase in personal net lending - the deus ex machina that had conjured Nigel Lawson's economic miracle - came to an end. The debt itself never fell at all but relative to income it suddenly stopped rising and then held steady. The consequences for net lending and for the economy were dramatic. Net lending fell from about 18 per cent of income (not all that much higher than now [2003]) to about 5 per cent, so spendable funds were reduced by about 13 percentage points. As a result there was a fall in GDP between 1989 and 1992 of about 7 per cent relative to trend - the fall in personal expenditure being large enough to account for the entire recession - and a rise in unemployment of about 1.3m."
http://www-cfap.jbs.cam.ac.uk/publications/files/Godley%20FT%20060803.pdf

Looking at the present UK consumer debt mountain of £1.4 trillion, that history looks horribly familiar and mocks GB's much vaunted claim to have abolished boom and bust.

I have to admit that I'm not persuaded by Professor Buiter's prescription - or by George Osborne's but then, who am I?

[Bob B]

Prof Buiter seems to be overlooking the (?) inescapable macroeconomic policy Trilemma - tut, tut:

"policy makers in open economies face a macroeconomic trilemma. Typically they are confronted with three typically desirable, yet contradictory objectives:

(1) to stabilize the exchange rate;
(2) to enjoy free international capital mobility;
(3) to engage in monetary policy orientated towards domestic goals.

Because only two out of the three objectives can be mutually consistent, policymakers must decide which one to give up. This is the trilemma."
http://elsa.berkeley.edu/~obstfeld/ost12.pdf

Prof Buiter wants to fix the exchange rate and give up on national autonomy in "monetary policy orientated towards domestic goals" - such as targeting the national inflation rate.

I believe that most of us prefer to retain national monetary autonomy and, for that, give up on trying to fix the exchange rate.

[Morgan]

Sterling up today, I see...

[Bob B]

It's always hazardous interpreting the reasons for one day's twitch in exchange rates:
http://uk.reuters.com/article/usDollarRpt/idUKL0235243420080602?sp=true

"Nobel laureate James Tobin reports that one of his Yale students went to work for the Chicago Mercantile Exchange as an assistannt to an active trader who was a former economics professor. After a few weeks, the young man asked about the long-run calculations that governed the trades. He was told 'Sonny, my long-run is the next ten minutes.'"
Robert Solomon: Money on the Move (Princeton UP, 1999) p.14.

As Keynes famously once put it from experience: "The market can stay irrational longer than you can stay solvent."

But what's new?

“The prize must surely go to the unknown soul who started ‘A Company for carrying on undertaking of great advantage, but nobody knows what it is.’ The prospectus promised unheard of rewards. At nine o’clock in the morning, when the subscription books opened, crowds of people from all walks of life practically beat down the door in an effort to subscribe. Within five hours a thousand investors handed over their money for shares in the company. Not being greedy himself, the promoter promptly closed up shop and set off for the Continent. He was never heard of again.”
Burton Malkiel: A Random Walk Down Wall Street, on the South Sea Bubble of 1720.

The case for relying on (regulated) markets where property rights are enforced is rather like the argument Churchill made for democracy as the word possible system apart from all the others.

It's a bit sad that GW Bush goes around proclaiming that "free market capitalism - with regulation" is the best way without realising that's an oxymoron. Mind you, the public discussion evidently underway in America on whether to nationalize General Motors to save it from the knackers yard does indicate an impressive degree of pragmatism.