Brexit Aftermath: Printing Money, or Taxes?

I notice that recently (just before the tactical nuke went off) a bright spark amongst the Graun writers opined that there was not much for it than for Labour to "pivot to Revoke" (everyone has to 'pivot' these days - so much more delicate than U-turning or just plain changing your mind: and a lot more dignified than flip-flopping.)  This is in keeping with Polly Toynbee declaring 'civil war', as she has done in her bid to beat Owen Jones in the hyper-ventilation stakes. 

So, as the armies head off doggedly to Philippi, we are left to wonder about post-Brexit strategy - notwithstanding our musings earlier in the week as to whether Cummings/Johnson even has one, beyond a GE at any rate.

Aside from dealing with short term issues and civil commotion of various sorts (not so easily brushed aside in reality, I well realise) the question will surely arise: to print money, or to tax?  Nations have been perennially been confronted with this issue in times of War (Polly's coinage, not mine) and its aftermath.  It seems to me that (a) there is a very strong anti-tax camp within the Tories (rather like 18th & 19th century America, in fact - they always printed money); (b) Keynsian spending is getting a new lease of life in several quarters; and (c) even McDonnell hasn't sounded too bullish on tax, and the Corbyn-Left are toying with something called Modern Monetary Theory which seems to absolve them of the need to do anything so atavistic as smashing the rich with a supertax.

I freely admit to knowing nothing about macro-economc theory (even as I reckon to know quite a bit about practical micro-economics).  But I well recall how our good host Mr CU predicted Quantitative Easing last time around (and, for good measure, the £/$ collapse from 2.10).  

What do the highly knowledgeable, or even the more modest, C@W readers reckon (i) Boris / Javid; and (ii) McDonnell have up their sleeves for us, in the event they have their hands on the levers of power next year?

ND

Trump's alternative monetary policy

(Firstly, having been away for a couple of weeks my thanks to Nick and BQ for covering the blog, less thanks for putting up such good stuff that now I need to up my game!)


In the USA, much like the UK, the Federal Reserve is an independent body. They make decisions on their own balance sheet and set decisions on interest rates by dint of their reading of the market. The US President and rest of the Government are just bystanders.


Of course, it is not in the President's interest to endure this. After all, the Fed has no elections to win and the current President is very focused on winning one in October next year.


Now as we all know, economics and a good economy is not everything or else in the UK we would not have had Blair as Prime Minister in the late 1990's. However, there is a small correlation with plenty of jobs and a growing economy helping incumbent Governments.


As such, Mr Trump does not want the Fed to raise rates. In the Fed's view the US economy is at the end of a long-expansionary period. They have had very low rates and a huge amount of Quantitative Easing to juice the economy after the Financial Crash of 2008. Now the banking system is nearly recovered and the US is steadily creating plenty of jobs. House prices are rising and the stock market sits at all time highs.


So taking away the punch bowl would seems a logical thing to do. But raising rates may slow the economy and Trump does not want that with only 14 months to an election. Interest rate rises are delayed action too (though I doubt now the old mantra of taking 2 years to feed into the economy, modern tech and communications will have seriously reduced this).


What is Trump to do when all this is out of his control? Well, he could start a trade war with China. This is in his gift as President. Slapping Tariff's on China has the effect of slowing trade and taking the shine off the economy. As a result, it makes the Fed's predictions about the economy change and so with their change in viewpoint, comes a change in policy.


Last week, the Fed lowered interest rates, in due course this will come to be seen as a poor policy move, just as raising rates in early 2007/8 was the wrong thing to do (and as we wrote back then too!).


They lowered rates because a $300 billion trade war with China is not good for the US economy.


However, Trump can, and indeed has, fluctuated wildly with the trade war rhetoric and has the power to end the trade war tomorrow. He is far more flexible than the Fed and has fewer constraints (no monthly meetings or pesky Boards to convince).


Trump can game the system this way for domestic monetary policy. It is a very clever way to get change, albeit literally playing with the livelihoods of Americans in the process - but hey, what else is a President supposed to do?

Radical pound devaluation strategy begins

Here we go then. I postulated some time ago, before all the talk started I may add, that there was a window for printing money in a real deflationary trap. The basic idea being, that with money being destroyed by the collapse in asset values so quickly, then the replacement of it into the system will not cause immediate hyperinflation.

However, the markets are not going to take this lightly and the Pound will sink further. This is now being actively encouraged by the Government. I cannot remember when Government last public wanted a lower currency ( I don't think the 1992 ERM crisis can be referred to here, as it finished the Tories for a generation, I am sure they did not want that). It is perhaps a sign of the times that we are to be congratulated for being amongst the first to join the race to the bottom.

However, the window the Bank of England have is actually very small. Despite all the assurances, CPI inflation is not negative and may only be so for a quarter or so this year. The UK is not Japan and the weakened Pound will ignite inflation.

The key here is that hyperinflation does not happen over many months, it happens very, very quickly. The Government and Bank of England are courageous try the 'Quantitative Easing' experiment for now, but I would suggest one very small burst at best is enough to see if it works or not. Further efforts will kill the patient due to political interference.

Bank of England Interest rate decision - 0.5% cut

The UK Central bank long ago lost control of monetary policy in the UK and we have been battered by the markets ever since. The pound taking a kicking and the stock market too. Even UK Gilts have lost their glean as international investors withdraw their money from the UK at record rates.

In the face of this, the Bank has decided to massively reduce interest rates, now down to 1.5%. Today another 0.5% cut is expected. I don't see this as having much effect on the real economy in the UK. It is not as if banks are going to cut the rates they charge businesses for lending in such a difficult environment. It may help to lower LIBOR - but no one cares about that anymore as no banks lend to each other anyway.

With real courage, the bank would leave the rate where it is, acknowledging that this phase of economic policy has reached its final point. The next phase is to replace bank lending to companies with direct government lending, this will stimulate the economy as is needed.

Done well it may even turn a small profit for the HM Treasury.

The bank need to wrestle back control from the markets and stop copying slavishly every US decision. Inflation is going to fall anyway, negative rates are not the answer - just look at Japan 1990-2008.

UPDATE: As predicted, they did the 0.5% cut.