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Macroeconomics Today

The Bank of England just cut interest rates to 0.25%, announced it will buy 60bn government bonds and 10bn corporate bonds, and reduced its growth predictions (for what they are worth) from 2.3% to 0.8%. There is talk of reducing the rate of VAT. There is talk of reducing corporation tax, which incidentally worries Northern Ireland pundits because a plan to do the same thing there might lose some of its advantage.

I am not sure whether to be happy or sad. I will stick to happy for now, because I am an unrelenting optimist. Could Brexit panic the establishment into turning Britain into Chris Patten’s Hong Kong to save the economy?

Edit: I should have said John Copperthwaite, not Chris Patten.

43 comments to Macroeconomics Today

  • bob sykes

    All the central banks have poured enormous amounts of money into the global economy and the global economy refuses to respond. I think it is obvious that we have been in a world recession for at least a year; the Baltic Dry Index, the American rail freight index, and the fall of commodity prices prove that. We are also in a strong deflationary cycle, but the cash inputs have generated just enough inflation to hide it. All in all, we are due for a major contraction, and the central banks no longer have any levers to pull.

  • Mary Contrary

    Could Brexit panic the establishment into turning Britain into Chris Patten’s Hong Kong to save the economy?

    Having the Bank “buy government bonds” (i.e. print money) doesn’t sound much like it, no.

  • Stephen Houghton

    Am I right in thinking that sales tax would be better than VAT, in that one taxes production and the other consumption.

  • Laird

    I agree that Bob is probably correct.

    Panic among your betters? Absolutely. Turning the UK into Hong Kong? Not even close. The government shouldn’t be setting interest rates at all, and setting them artificially low is grossly distortive and ultimately economically destructive. More QE is simply doubling down on a policy which is already demonstrably a failure (witness the reduction in the growth “prediction” by two-thirds). Not enough leeches before, but more will surely fix things! The only remotely positive thing is the talk about tax cuts, but so far it’s merely talk. I wouldn’t hold my breath waiting for actual implementation.

    Stephen, that depends entirely on your perspective. From the government’s point of view, a VAT is superior because it is hidden from the end consumer; you can’t tell how much of the retail price is the embedded tax. A sales tax, on the other hand, is completely transparent and, if it gets too high, can engender voter revolt. But in the end both are taxes on consumption, so there’s nothing to choose between them on that basis.

  • RRS

    Bob Sykes:

    All the central banks have poured enormous amounts of money into the global economy and the global economy refuses to respond.

    Change that around a bit;

    All “central banks” have poured enormous amounts of credit, as money, into sovereign debt, which has been incurred for political objectives in participations in the “global economy.”

    “Banks,” central or not, are not exempt from the impacts of failing to consistently re-balance credit flows with cash flows. When the latter exceed the former for extended periods arroyos will appear and the cash flows will be absorbed in those empty channels.

  • RRS

    sorry ! misstatement; should have read:

    “…When the former exceed the latter …”

  • Watchman

    Stephen,

    You can reclaim VAT to some extent as a producer, so it is probably better interpreted as a rather over-complex sales tax.

  • RRS

    The “Trade Indicators” cited by Bob Sykes, as well as other indicators evince a trend of diminutions in exchanges. Other evidence shows a correlated increase in third (or more) party external interpositions or intrusions into the broad spectrum of exchange-oriented economies; usually for identifiable social or political objectives.

    Supply is widely constrained to respond to demand through a series of social and political “filters;” often mutually conflicting and always distorting.

    There is no reason not to expect this as we become a more and more “managed society.” The “managers” will reach out to extend their management.

    “Entrepreneurship” will more and more include “finding ways around the managers.” Meanwhile things will get tighter as the managers vie with one another for turf.

    Good luck with the coming year.

  • Brad

    Tax cuts in conjunction with borrowing is not a positive. It is simply more smoke and mirrors. The US has been living on such illusions for 35 years. But very soon, as the smoke clears, it’s going to become brutally clear to all those people who have been saying “I’m going to stick it to that other guy on the other side of the smoke screen- to make sure I get MY rightful due” that they’ve simply been looking at their reflection in a mirror the whole time.

  • Rob Fisher (Surrey)

    I wasn’t thinking that setting low interest rates was anything Hong Kong like. I was thinking about the possibility of tax cuts to boost growth when that fails. There is talk of it. It’s only talk, but it’s more than we’ve had for a long time.

  • Patrick Crozier

    Hong Kong’s success had rather more to do with John Cowperthwaite than with Chris Patten. Even so, tax cuts are not a panacea. I do not believe there is any level of tax that would end current budget deficits. The only solution is to spend less, vastly less. But who is going to vote for that?

  • Alan Peakall

    We cannot be far off the moment when a shock report from HSBC’s Stephen King announces that not only have central banks run out of monetary ammunition, but, still worse, commentators have run out of jokes exploiting the coincidence of his name with that of horror writer.

  • Laird

    Alan, central banks aren’t ever going to run out of monetary ammunition; they can “print” (loosely speaking) an infinite amount of it, just as commentators can produce an infinite number of jokes about King’s name. What both will actually run into is the decreasing, and ultimately total, ineffectiveness of that production: the jokes cease to amuse, and the fiat money will cease to have value.

  • PhilB

    One simple, infallible rule when dealing with monetary experts is this. Ask their opinion about Government Bonds and if their response does not contain a rich seam of swear words that would make a drunken sailor blush, you know that he hasn’t a clue.

    As a rule of thumb, divide the interest rate into 72 to see how many years it will take to double your initial investment. On that basis, a 0.25% interest rate (if you can manage to obtain such a rate) would take … 288 years. Set up an Excel spreadsheet if you don’t believe me and see for yourselves.

    In short, we are screwed (in every sense of the word).

  • Alex

    So the UK Gilt GB00BYZW3G56 maturing in 2026 would take 48 years to double the investment, or almost 4 times longer than it will exist.

    Aren’t gilts and other government bonds mainly bought and sold in large-ish quantities for the marginal improvement on their prices in troubled times? Given the UK government is yet to default on its bonds (gilts) it does seem like a safe investment even if it doesn’t have a good yield.

  • Alex

    Longer again, the above should say. Oops.

  • PeterT

    I have no doubt the UK government will be able to find buyers for its debt. Private sector pension funds ultimately want to hold gilts, one day, to fund their liabilities. The value of index linked gilts about £300bn. Inflation linked liabilities are in excess of £1trn.

  • bobby b

    I wonder if they realize what damage they’re doing to the middle classes with these rates?

    I’m in the process of refinancing a house, and also in accompanying my son as he tries to buy a new pickup truck.

    In both cases, I’ve been amazed at how incredibly cheap money has become. I’m being quoted mortgage rates of around 3%, while my son’s truck purchase will likely be financed around 5-6%

    My present mortgage was an incredible deal (maybe ten years ago) at 8%. Also, maybe ten years ago, vehicle finance ran anywhere from 10% to 20%, depending on your credit.

    The downside is that it is much, much harder to qualify for a loan now. My son makes a decent living as a young (23) carpenter, but it’s become apparent that I’m going to have to co-sign to get him the loan he needs.

    So, just as the ever-rising equity markets primarily benefit those who have the spare bucks to buy equities, the cheap credit markets are benefiting those with high income and assets, while leaving most of the people in the dust.

    Furthering the divide between haves and almost-haves is not a recipe for a strong and stable economy.

  • Nico

    The global recession is caused by demographics (falling fertility rates, with population curves curbing down).

    All the stimulus in the world can’t help.

  • Paul Marks

    Errr no Rob.

    The Credit Bubble policy of the Bank of England is not a good thing.

    Neither is deficit spending by the government.

    If I go on I will stop being polite – in relation to Governor Mark Carney and so (“and so on” because Chancellor Philip Hammond and First Lord of the Treasury Mrs May are just as guilty).

    By the way Patrick is correct – associating Chris Patton with the success of Hong Kong is insane, he was in charge long after Hong Kong became a success and did HARM whilst he was there (on unions and so on).

    And NO demographics will not be the cause of the coming crash.

    I have been commenting on this site for many years.

    Clearly I have just been talking to myself.

  • Paul Marks, August 5, 2016 at 7:08 am, is right that Hong Kong’s success was due to a much earlier governor deciding to ignore what was fashionable back in the UK and has sweet fresh air to do with the useless Chris Patton.

  • Rob Fisher (Surrey)

    Paul and Patrick, thanks for the correction about Patten. I was just referring to the low taxes and few regulations; clearly I don’t know enough about Hong Kong.

    And Paul, I agree about BoE policy. It makes me sad. The happy part is for the possibility of reducing taxes and regulations. I have a feeling it might come to that because there are no other levers left to pull; because it is a way to differentiate us from the rest of Europe; a way to get investment and growth. Obviously spending needs to be cut but welfare reforms and the like are less painful and controversial if people are getting richer.

  • Cal

    I’d say Japan is more the model for the UK than Hong Kong.

  • Alisa

    Obviously spending needs to be cut but welfare reforms and the like are less painful and controversial if people are getting richer.

    But Rob, people are not getting richer and are not going to – not thanks to lower taxes and regulation alone. Most of us in the West are not going to get richer, as long as spending is not cut drastically – and even when it is, we are still going to get poorer before we get richer again.

  • llamas

    In regard to Sir John Cowperthwaite and his policies in Hong Kong, the single most-important policy decision he made was to stop (or not start) collecting most economic data entirely. To be sure, the HK administration could see tax revenues and expenditures, but that was about it – they simply had no idea of the true size of the HK economy, nor of trends within the economy, or anything. He made Adam Smith’s ‘invisible hand’ truly invisible.

    Most of the problem of state manipulation of economies starts because they can see (or think they can see) what’s going on. The time it takes for them to start twiddling the controls in ways they think will do “good” – whatever that means – can be measured with an eggtimer. cf Venezuela, which has been taken from a country with fabulous resource wealth and every advantage to a 3rd World hell-hole in less than 20 years, and all by the interference of ‘economists’ and ‘experts’ – Top Men – with the basic elements of a functioning economy.

    Cowperthwaite went beyond laiisez faire to a regime of je ne sais rien – his administration honestly didn’t know what the HK economy was doing, which made it very hard indeed to screw it up.

    llater,

    llamas

  • RRS

    Well, with Alisa’s comment we come ’round the circle and back to the normative libertarian arguments:

    In both the U S and the UK the functions of governments (uses of the mechanisms) have been continuously over-extended, requiring more and more sources of funding (revenues and debt); overload on capacities for orderly performances of necessary or max-u functions; increasing resultant incompetence in more and more functions;(it can not be used to do the necessary properly because it is being used to do too many things that can not be done well by those mechanisms; or, only done wrongly).

    “Government Spending” is, in reality, the costs incurred in attempting to use the mechanisms of governments – mostly now for functions that are distorted by the processes of those mechanisms.

    Regulations and coercions are required for the effective (mis)use of those mechanisms. Those, in turn impact liberty and the nature of what would otherwise be normal human interactions. Load that all with the impact of the drain of resources for funding those uses of government mechanisms – and you have the conditions of our two societies, which, despite it all continue to support (or bear with) a replicating political class.

    Normative Libertarianism is framed by the impacts of the functions of governments on Liberty and thus to limit those impacts by limiting those functions.

  • Lee Moore

    Paul and Patrick, thanks for the correction about Patten. I was just referring to the low taxes and few regulations; clearly I don’t know enough about Hong Kong.

    Never apologise, never explain. I thought you were elegantly and wittily tweaking Fat Pang’s dirigiste Europhile tail – reminding us that that arrogant phoney had been sent off to the colonies to have his face rubbed in the reality of how successful not following his advice could be.

  • Rob Fisher (Surrey)

    Yeah, yeah, that was totally what I meant, Lee. 😀

  • Laird

    @ Rob: “The happy part is for the possibility of reducing taxes and regulations.” (my emphasis)

    That’s the first time you’ve mentioned regulations; the original post only mentioned reducing taxes (of various forms). I rather think that’s the more important of the two. Thus I disagree in part with Alisa’s comment: reducing taxes isn’t necessarily going to “make us richer”, but reducing regulations surely will. That gets to RRS’s point: reducing regulations is, in effect, limiting the mechanisms of government, and doing so translates, both necessarily and immediately, into a freer and more productive economy. Reducing taxes can have a similar effect (depending upon how it’s done; the incidence of any tax is a crucial but frequently overlooked analytical element), but it takes far longer to have any noticeable effect.

    In a world of unrestricted central bank monetary expansion, actual spending cuts matter little (in the short run); the government merely “prints” (loosely speaking) whatever it needs. The only check on this is the collapse (or imminent collapse, presaged by runaway inflation) of the system itself; even the global capital markets don’t really have any control when the Federal Reserve and the Bank of England can simply buy up all the debt their governments manufacture. But that’s a long-term effect. In the short (and probably even intermediate) term the most efficacious means of stimulating economic growth is to remove the dead hand of government, i.e., reduce regulation. That would translate, and quickly, into increased wealth for nearly all, not merely the wealthy few who are the only real beneficiaries of the current governmental subsidy of the equity markets. And a rising tide really does lift all boats; a vibrant economy will of itself limit the need for government spending in many crucial areas, and can form the basis for even further governmental shrinkage. If the system can be salvaged at all, meaningful regulatory reform must be the starting point.

    llamas’ point about ceasing to collect economic data seems counter-intuitive, but is a good one. Most management consultants will tell you to collect all the data you can (“you can’t control what you don’t measure”), and they’re right, but managing a business enterprise is entirely different than running a government. For a government to collect the massive amounts of raw data that ours does is merely an invitation to mischief. GDP (as currently defined) is an essentially meaningless number; eliminate it. CPI and the various other price indices are woefully inaccurate and subject to gross manipulation to the point of outright fraud; eliminate them. The Current Account balance (trade surplus/deficit) is irrelevant; forget about it. The only numbers a government really needs are revenues, expenditures and population size. Shut down the Bureau of Economic Affairs and stop measuring irrelevancies and ephemera.

    (BTW, I enjoyed Lee Moore’s last comment!)

  • Alisa

    I disagree, Laird: nowhere have I argued against lowering taxes or reducing regulation – quite the opposite, because of course they would make our economies vastly more productive and generate wealth, immediately. What I was arguing against was the assertion that at this point in time these measures will make us richer – which they will not, as all this newly generated wealth will first have to go towards paying off the unfathomable amounts of debt, acquired mostly by governments, but also by private individuals. Quite how long a period of time it would take for these new low-tax-and-regulation economies to pay off these debts, reaching a point where we could all begin working for ourselves and begin to truly get richer, is a different question.

  • RRS

    Alisa-

    To enlarge upon your points, we have to consider WHO are the creditors of the various segments of the debts, and in what forms do they “hold” those claims.

    Is it possible that many of the forms will become “invalid” or unenforceable – like the foreclosure sales in the late 20s early 30s in the U S Midwest, where bidders paid 20 cents for an implement, and gave it back to the debtor.

    Debts, like other obligations, have a way of “dying.”

  • Alisa

    No RRS, I don’t believe they do – they just take different forms and get “reassigned”, albeit in ways that are not always easily recognizable. I’m afraid money (in the sense of wealth), is subject to the same laws of physics as everything else – specifically to the law of conservation of mass. Or put differently, there ain’t no such thing as free lunch.

  • Paul Marks

    I apologise Rob – I am in vile temper and I have no one (guilty) to hit.

    As for Mark Carney, Philip Hammond and Mrs May – the last words of Charlton Heston’s character in “The Planet of the Apes” spring to mind.

  • RRS

    Alisa

    Fear I was being a bit obtuse.

    Taking a leaf from Jacobi to “invert” the problem to look for a solution.

  • PersonFromPorlock

    Patrick Crozier
    August 4, 2016 at 7:12 pm
    The only solution is to spend less, vastly less. But who is going to vote for that?

    The survivors of ‘the night of the lamp posts’, probably.

  • Laird

    Not so, Alisa. Using that increased wealth to pay off private debt certainly makes one “richer”. Net worth is net of debt, and as that declines the “worth” part necessarily increases; it’s simple math. (And of course your creditor’s balance sheet becomes stronger, as the nonliquid asset of a loan is converted into cash, so he’s better off, too, albeit not actually richer.) Government debt is another matter. Yes, it will have to be paid back eventually, and I’m sure we can agree the such debt is merely deferred taxation, but just because the government is broke doesn’t mean that we as individuals are. So I stand by my assertion: removing the dead hand of government regulation will very quickly increase our collective wealth (admittedly, more for some than for others, but an increase nonetheless). It will make us all, not necessarily rich, but certainly richer; we will be moving in the right direction.

  • Alisa

    Well Laird, on private debt I guess I can agree with you, as technically speaking less debt does mean more wealth, at least potentially (meaning, the sooner one has paid off one’s debt, the sooner he can buy things with the currency he earns – the things being the actual wealth).

    just because the government is broke doesn’t mean that we as individuals are

    Of course not, in theory – unfortunately, in practice that is precisely what is most likely to happen. One of the reasons government debt is so much worse than private debt, is that the latter is more “honest”, meaning straightforward: X owes money to Y, X earns more money as a result of reduced taxes and regulations, X pays back what he owed to Y. Under this narrow scenario, reduced taxes and regulation do increase X’s ability to earn money, consequently increasing his ability to pay off his debt, and then get on with his life and his efforts to become richer, if he so wishes.

    That is not how things are likely to work with government debt, as there are no individuals who willingly entered a loan agreement – rather, there are individuals (politicians) who willingly entered “loan” agreements on behalf of the rest of us collectively, without our consent. That being the case, I see no possibility of repayment of that debt in a manner even approaching something that could be described as “fair” (I use that word in its technical sense, not moral one), even if our Lords and Masters suddenly became inclined towards such technical fairness.

    So I still maintain that when (let alone if) our economies in the West are put on what you quite correctly describe as the right track – meaning, taxes and regulations are reduced to a bare minimum, the necessity to repay the huge government debt will necessarily make a lot of people poorer than they were before, and these are bound to be individuals who were not all that wealthy to begin with, but did have reasonable income and assets. Those who were truly poor to begin with may not have much to lose anyway – I have no idea how many such people are there in the West. Some of the truly wealthy may in fact manage to save some of their wealth, but probably not all of it (which by definition will also make them less-rich). And of course, a small number of people will in fact get richer, this time (as opposed to typical Socialist lies) truly at the expense of the rest of us.

  • Alisa

    Correction:

    So I still maintain that when (let alone if) our economies in the West are put on what you quite correctly describe as the right track

    should read

    So I still maintain that even when (let alone if) our economies in the West are put on what you quite correctly describe as the right track

    Lest anyone suspect that I’m blaming putting economies on the right track for the necessity to repay debt or for making people poorer – of course, nothing could be further from truth.

  • Laird

    Paying off an existing debt cannot make you poorer; at worst it’s neutral, reducing both assets and liabilities equally. The net worth hasn’t changed at all. And if a growing economy leads to more personal wealth but that increase is taxed away to pay off government debt, you’re still no worse off personally; that could only be true if the tax increase exceeds your earnings gain (highly unlikely). Again, at worst it’s neutral, and more likely you will still be better off, if not by quite as much as you would have been absent the tax increase.

    But let’s try the experiment and get some empirical evidence!

  • Alisa

    Paying off an existing debt cannot make you poorer; at worst it’s neutral, reducing both assets and liabilities equally

    As I said earlier, this is only true with regard to private debt.

    And if a growing economy leads to more personal wealth but that increase is taxed away to pay off government debt, you’re still no worse off personally

    Of course I am worse off personally – the money was borrowed in my name, with no personal benefit to me. And now I am supposed to help pay it off – how is that neutral?

    But let’s try the experiment and get some empirical evidence!

    Where do I sign up?

  • Laird

    Liberland?