Yves here. With too much Trump-generated furor, we’ve managed to skip over a potentially important development, that of a possible slow-motion currency crisis/bond market temper tantrum in the UK. To give a sense of sentiment, this is the landing page of Bloomberg’s UK site. Bloomberg generally does not run headlines that take up the the full width of the page:
And from a widely-read Bloomberg story yesterday, Britain’s Bond Crisis Invokes Memory of 1976 Crisis:1
That’s the analysis of former Bank of England rate-setter Martin Weale, who said the Labour government may have to resort to austerity to reassure markets that it will address the UK’s escalating debt burden if sentiment does not change….
Over the past few days, long term UK borrowing costs have soared and the pound has fallen – a rare combination that can signal investors have lost faith in the government’s ability to keep a lid on the national debt and control inflation.
Typically, higher yields would support a currency, but Thursday morning sterling sunk below $1.23 to its lowest level since November 2023, having started the year above $1.25. Still, the currency’s latest struggles are less severe than in September 2022, when it crashed from close to $1.17 to below $1.07 in a couple of weeks.
And Britain’s market troubles are not an isolated case, coming amid a global selloff in bonds.
Nevertheless, Weale said the events echo the 1976 debt crisis “nightmare” that forced the government to ask the International Monetary Fund for a bailout…
Other economists and investors blamed the market moves on skepticism around Labour’s promise to fund a large increase in spending with fastest growth….
Almost half a century ago, Britain applied to the IMF for a $3.9 billion loan after large budget and trade deficits plunged the country into crisis. In return, the government agreed to IMF-imposed austerity. Britain is today running twin deficits again, and has been for many years.
Countering that view is Wolf Richter in “Bond Market Rout” in the UK (like in the US) Only Pushes the 10-Year Yield into Low End of Old Normal after Many Years of Interest Rate Repression. While that is true (as is the fact that mortgage rates in the US are in what was old normal before the crisis), nearly a full generation has passed under a low interest rate regime. Policy-makers acted as if it would continue and are having great difficulty recalibrating.
If you click through, while the tweet below provides another high level recap of the UK’s conundrum, El-Erian advocates hard core neoliberalism, as in austerity and crushing labor bargaining power. Um, decades of a lower dose of this sort of thing is what got the UK in this mess in the first place:
The UK continues to experience the unhelpful combination of higher yields and a weaker currency (see Bloomberg chart below on the British Pounds depreciation versus the Dollar over the last three months).
This combination, which historically has been more common in developing… pic.twitter.com/BUeazw7gzZ— Mohamed A. El-Erian (@elerianm) January 9, 2025
Additional detail:
The surge in UK debt costs threatens to wipe out Chancellor Rachel Reeves’ slim budget buffer and create instability ahead of an official fiscal update on March 26, as @lizzzburden reports https://t.co/Yt7WqggkQo pic.twitter.com/XIDd8ZlwXW
— Bloomberg TV (@BloombergTV) January 9, 2025
Admittedly, as with stagflation in the US in the 1970s, there’s no quick and easy remedy to higher energy prices, but that is intensifying an underlying not-wonderful set of fundamentals. High-ish inflation and borderline recession mean the usual MMT prescription of more net spending will simply generate more price increases, unless there are target areas where more spending would increase capacity enough so as to offset or even reverse inflationary effects. Recall that none other that the staunch neoliberal Larry Summers argued during the post crisis period of weak growth in the US, that spending on infrastructure would generate $3 for every $1 of outlay (obviously up to some limit). But the UK seems incapable of thinking in industrial policy terms to get itself out of its mess. While in theory the Labour claims that it will spend more to get higher growth signals a vague recognition that well-focused spending can indeed increase output, the Blairite Starmer Labour Party lacks the imagination and cred to devise and promote the needed ambitious programs.
By City A.M. Cross posted from OilPrice
- The pound sterling has fallen to its lowest level in more than a year, and UK government bond yields have reached their highest point since 2008.
- Investors are concerned about the UK’s fiscal outlook and the Bank of England’s ability to control inflation.
- The UK government’s bond issuance is expected to reach almost £300bn this year, which could put further pressure on the economy.
Pound sterling has continued to sell off this morning, and UK government bond yields have ticked higher as UK risk assets remain under pressure.
The pound fell below $1.23 against the dollar in early trade and is currently down 0.7 per cent against the dollar and 0.6 per cent against the euro.
Meanwhile, the domestically focused FTSE 250 index opened lower 0.6 per cent.
The day after 30-year government bond yields reached their highest this century, yesterday 10-year government yields jumped to 4.82 per cent, the highest since August 2008.
“We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed,” said Michael Brown, senior research strategist at Pepperstone.
The pound also fell against all major currencies yesterday, plummeting more than one per cent versus the dollar to its lowest in more than a year at $1.238.
Derivatives point to the weakness in the pound continuing, with one-week sterling to dollar risk reversals falling to the most negative since early November, which implies puts trading at the biggest premium over calls since US election day.
“In part, this move is shadowing a rise in US bond yields, driven by signs of a still strong US economy alongside indications of persistent inflation that are prompting investors to review expectations for two rate cuts in the year ahead,” explained Lindsay James, investment strategist at Quilter Investors.
“Term premium, the additional yield investors demand for lending long-term money, has also been on the rise, with one factor being the pure level of uncertainty around the future path of inflation and the productive potential of the economy.”
With the UK enduring stickier inflation than most other developed economies, the Bank of England has been towing a more hawkish line than most of its peers.
However, a key factor continues to be the size of the bond sales by both the UK government and the Bank of England.
The government’s bond issuance is expected to reach almost £300bn this year, driving up yields even as the economy begins to show cracks.
Stagnant growth and the continuing gilt sell-off has “all but wiped out Chancellor Reeves’ fiscal headroom, which was already incredibly slim at around £10bn,” noted Brown.
_____
1 Did AI write this headline? A crisis cannot invoke. People or their institutions can. It should read “evokes”.
The UK is in a buggers muddle but Elon and the City boys and BOE are determined to force Labour out for Refrom party who will foist private health care on us all.
This sounds to me like class warfare, even against a party as craven as the Labour Party:
From the quoted Bloomberg article: “That’s the analysis of former Bank of England rate-setter Martin Weale, who said the Labour government may have to resort to austerity to reassure markets that it will address the UK’s escalating debt burden if sentiment does not change….”
Am I to believe that the underlying problems of the U.K. economy (deindustrialization, feudal land holdings, concentration of wealth, financialization of London) somehow didn’t exist under Boris Johnson and the Tories?
It sounds as if the lords and ladies of the manor simply want to loot and pillage, which is their specialty.
Meanwhile, the U.K. government maintains the glorious imperiali Project Ukraine, to avoid facing the devolution of England into a flavor-starved Poland.
Lords and ladies looting and pillaging? You forgot rape which the Brits call ‘grooming gangs’ to make it more palatable. They hate their citizens that much.
Not just rape, but rape of teenagers/kids. There are no ‘grooming gangs’ targeting 30 year olds.
The Catholic church and the CofE, along with the entertainment (Saville etc) industry, children’s homes (Kincoro et all), Politicians (Cyril Smith/Rochdale among others) have been doing this sort of atrocity and getting it covered up by the same home grown British institutions for decades. In the 59’s we were shipping orphan kids and children of unmarried women/girls to Australia New Zealand and Canada by the shipload.
Let’s not run away with the idea that these odious practices are alien to British culture, society and it’s institutions, or that it is somehow only and exclusively new and limited to, let’s go with, “non-natives”.
Growth prospects for the UK are grim, partly but not wholly because of the self-harming act of leaving the EU Single Market. Before 2016 the UK was well on the way to becoming the financial and commercial capital of the EU. Now what? Nobody appears to have any real idea how to offset the damage in order to generate any rise in living standards, sorely needed in the poorer regions outside the South-East, which have been the worst hit by Brexit.
Whether or not it was a conscious decision by the Tory Government is unclear IMO, but the one factor which has boosted the economy in recent years has been a large increase in immigration into the UK. However, as many of these immigrants have brought dependents with them, the net effect seems to have been to lower per capita income in the UK. That many of them are coming from the Third World is going to create political problems for the Government if they do not significantly cut the inflow. I read comments on social media to the effect ‘import the Third World and you become the Third World’. The current angry debate on ‘grooming gangs’ shows the potential for street violence like the anti-Muslim riots seen last summer, A real witches’ brew.
The most likely policy response in the UK IMO to current financial market pressures is likely to be via interest rates. Either the Bank of England will indicate no further cuts in interest rates in the near future or, if forced, an increase in interest rates will be announced. This will of course weaken the economy in 2025/6.
The UK economy nowadays really is a basket case. Its skill levels are poor by comparison with its neighbours, its infrastructure is in bad condition and it is outside the Single Market. Foreign investment has fallen, but why would foreign investors prioritise the UK nowadays?
I did not make that point and should have. Thanks for correcting that oversight.
It is a non-point, in my view. UK export growth has been similar out of the EU as in, just to different countries. And the EU itself is performing worse than the UK in GDP growth at the moment. The problem is austerity, unproductivity and adverse terms of trade.
Net Zero and War on Russia have given us some of the highest energy prices in Europe. Fifty years of neoliberalism and twenty years of immigration have given us sky high house prices and rock bottom public services expenditure, capital stock and investment per capita. The labouring poor have had no real demand increase in years, except through borrowing.
Now Labour have announced tax increases on the bourgeoisie. 20% VAT on private school fees, 20% IHT on inherited business and farming assets. Big increases in payroll taxes and minimum wages (hurtjng business hiring plans). Increases in stamp duty (hurting land sakes, taxes on a property purchase can be 10% of purchase price!). When you add these taxes to the economic rents that are sucked off shore from utilities and privatised devices, there is no wonder there is a deficit of demand and a lack of investment (we have gone from investing 500k in our farm to wondering if we should sell it and beat the rush).
The changes in IHT relief apply to private companies as well as to farms. The Treasury has modelled the farm changes very poorly (they confuse a stock with a flow! The number of farms is at least twice as high under the current rules). I spoke to private bankers to country estates today and they have had their busiest quarter ever fielding enquiries for finance (to fund dry tax charges now to rearrange structures to minimise future taxes).
All of these manoeuvres have a chilling effect on business and investment, with owners prioritising taking cash out to fund rearrangements. If the business changes are as badly modelled as the farm changes, investment must be on pause throughout the country. And people with liquid wealth are rebalancing their portfolios away from UK assets in search of growth.
It is a mess. But there are easy wins. Stop laying interest on overnight reserves to banksters and use the money to invest in infrastructure with a multiplier effect, to nationalise utilities that export profits offshore and to cut payroll and stamp taxes. Abandon virtue signalling net zero and subsidies for umdispatchable renewables and invest in nuclear power. Reduce immigration to historic levels, which will feel like an increase in public service capacity and will drive wages up.
A lot of the above measures are, funnily enough, Reform’s manifesto and quite a few a standard social democratic policies.
This is not correct. The UK had lower growth than EU averages, meaningfully so, post Brexit. Many articles not long after the break were chronicling the slippage.
See for instance:
Brexit Britain has ‘significantly underperformed’ other advanced economies, Goldman Sachs says CNBC
https://en.wikipedia.org/wiki/Economic_effects_of_Brexit
The fall in EU growth rates is due to the impact of sanctions on Russian energy and the resulting marked rise in costs, which has hit the UK too.
So the UK’s growth rate fell from a lower baseline.
When it comes to the UK, a lingering question I have is “What was the cost of the military adventures in the Middle East in the early to mid 2000s for the UK?”
Beyond the money spent, it does seem like other economic projects were stalled during that time as the focus anf priority was elsewhere.
I’m inclined to agree. While I don’t have any insights into the happenings of London’s financial circle, but I’d suspect some of this is post Brexit induced. From what I’ve read here and there since Brexit, the London/UK financial community has lost a lot of stature and market power. It only seems logical that foreigners with financial investments in the UK would be predisposed to moving their funds out of the UK over time. If there is enough volume one would expect bond prices to fall (rates to rise) as they are sold and the pound to fall as those leaving investments move to new currencies. This easily can become a spiraling situation as a falling currency eats into pound denominated asset returns which can trigger more foreign sales and more sales of the pound as money moves out of the UK dropping the value of the pound further; and imports become more expense so import inflation could even accelerate.
Sadly, in situations like this I believe history says most countries fail to actually implement policies that effectively work against this dynamic. The current fears about the UK government debt and deficit are not likely going to fix anything. At best austerity will crush spending and reduce imports which MAY cut some of the pound outflows, but that’s likely a lot of pain with no promise of success.
Brexit was irrelevant.
Freezing Russian assets killed then
The way Abramovitch was treated told Arabs to stay clear and Chinese – and Chelsea FC is a mess
This is completely Making Shit Up. Brexit has a very clear impact on UK commerce. The UK started to fall behind EU growth rates quickly. Key operations left the UK, including particularly those of big international finance firms. There is no evidence that the Russian asset freeze had ANY effect.
Your comments are too variable in quality. Many are very good and some are complete fabrications. I will no longer approve the latter. I trust you will become more discriminating.
Goosing immigration numbers is a trick that the finance parasites that rule us love. Same story in the other Commonwealth anglo countries. I can tell you that in Canada this has definitely lead to us getting poorer on a per capita basis despite overall GDP going up:
This was as of April 2024. What this tells us is there are limits to the immigration trick (duh!), but as long as aggregate GeeDeePee keeps going up and housing prices stay goosed, will the finance parasites care? What other easy neoshitlib levers are left to pull to keep this train on the rails, other than importing a few million more people ‘until morale improves’?
I suspect you are right about the hidden agenda behind immigration. Its been quite noticeable over the past decade or so that the UK has had GNP growth that looks quite healthy in comparison to most developed countries, until you break it down pp. It then starts to look very anaemic.
Of course, having immigration and a ‘relatively’ healthy demography can result in longer term growth, but a lot depends on the socio-economic status of the incomers. And that doesn’t look so great.
While the problems, especially in capital investment, have been apparent since the Tories came in (to give credit to Blair, there was a very significant improvement in some types of investment during the 1990’s), I think you are right that the UK is in slow puncture mode after Brexit. I’ve commented here before that the one bright sector of the UK economy seemed to be the high risk start up sector (mostly due to the financial attractiveness of London for venture capital), but I believe from some sources I’ve read that this is also faltering.
The ‘strategy’ of Labour, if there is as such, seems to me to be trying to find some sort of fine balance between being fiscally austere enough to keep the bond markets happy while pumping in enough cash into public services to staunch at least some of the Tory inflicted wounds, but is finding that there is simply no middle ground to be found.
Your last paragraph basically sums it up. Labour is caught in a bind between spending money the country doesn’t have and trying to demonstrate they are different from the Tories by at least funding public services. While they do bleat about how they inherited an economy on its knees etc. (and I do agree, they are beating a dead horse at this point), it is true.
Your point about a purposeful hidden agenda could also have merit. The Tories decimated public services in the 2010s and likely chose the sugar rush of more immigration to plug the gap. It has backfired pretty tremendously, since the UK also refused to focus on building infrastructure which would’ve had the effect of raising productivity and therefore per capita GDP. Now they have their biggest existential threat yet in Reform.
They also failed to address regional inequality, which also contributed to the rise of Reform. More importantly, it’s led to a reliance on London – without London, GDP per capita would be lower than Mississippi’s, the poorest state in the US. I won’t even get into London’s status as the money laundering capital of the world.
It is a shame, since post-2008, other economies have pulled well-ahead of the UK. While austerity might’ve been arguably necessary in the years that followed, it seems the Tories were content with allowing living standards to decline for too long and let Brexit dominate the conversation for the latter half of 2010s.
The Thatcherite tendencies took over, and now look where we are – enfeebled by the private sector. To use a personal example, I was in hospital and, in conversation, the doctor told me about how the NHS was being extorted by its procurement partners. £1,500 for £500 computer, £3,000 to knock down a wall, £120,000 for equipment that costs £30,000.
I saw this with my own eyes: a poster asking for donations to raise £130,000 for a new eye-scanning machine. I looked up the exact model there and then to see it could be bought for £50,000 from a supplier’s website. My partner (who works in the NHS) has seen herself how private contractors do poor jobs that take far too long.
Throwing more money at the problem won’t make it go away, nor will instituting even more middle management and paying hundreds of millions to the Big 4 consulting firms. The NHS is just one example, but public services and infrastructure need serious reforms, and as the post states, the Labour Party in its current form doesn’t have the cred or imagination to do so.
I can only hope that a crisis forces structural reforms, as it has in the PIGS countries, before things truly go to pot.
Psy, the country has as much money as it cares to spend.
The problem is access to real inputs (land, labour, commodities). A shortage of inputs because of low productivity means that investment creates temporary infkatioon, whether in domestically produced foods and services or imported ones. The trick is managing the political consequences of the short-run distributional sequelae of MMT expenditure in an open economy.
Austerity never, ever delivers the results claimed for it. It is simply a political choice designed to benefit the high end of town at the expense of the lower end – and increasingly, the middle.
Enough has been written by such wise people as Michael Hudson, Richard Murphy, Bill Mitchell, Warren Mosely, Stephanie Kelton and Anne Pettifor, for us to know better.
Labour should sack the piratical crew in the Bank of England, replacing them with people not corrupted by the banking sector, sort out the fifth column in the UK Treasury, and face the markets down.
Throw in an industrial policy worthy of the name, renationalisation without compensation of the monopoly utilities, and the much needed countrywide upgrading and developing of infrastructure, and the job would be on the way to being done.
PlutoniumKun: I’ve commented here before that the one bright sector of the UK economy seemed to be the high risk start up sector (mostly due to the financial attractiveness of London for venture capital), but I believe from some sources I’ve read that this is also faltering.
Correct.
Though the UK startup sector isn’t notable just for “the financial attractiveness of London for venture capital” but also — and primarily, I’d argue — because a lot of R&D comes out of the Oxford-Cambridge ecology that’s worth investing in. (Forex, ARM and Deep Mind are world class; there are others.)
But three months ago the managing partners of one large Silicon-Valley VC firm who’ve made substantial investments in UK startups (and who I have dealings with) decided that ON NO TERMS will they make any new investments in the UK till Starmer’s government and its 29 percent tax on long-term capital gains are gone. Period. Full stop.
Starmer and company claim to understand that the UK needs growth, but they not only are clueless about how to make it happen —
Starmer asks UK regulators for ideas to boost growth
https://www.bbc.co.uk/news/articles/cy0n14ywzqpo
— they’re doing everything to kill it. Of course, 29 percent long-term capital gains tax is going to drive away venture capital.
Which goes back to Yves’ point about industrial policy and UK elites’ complete inability — whether nominally Tory or Labour — to think in coherent terms about it.
This seems an odd response by a US fund.
– The fund will not be UK tax resident so the investors don’t care about UK CGT.
– If the partners are UK tax resident, then investing in non-UK companies won’t reduce their CGT charge on carried interest; if the partners are non-UK tax resident then the UK tax rate is irrelevant. And the 28% rate on carried interest was put in place by George Osborne in 2015!
– entrepreneurs may dislike the CGT charge increasing on sales of shareholdings but the increase is only from 20% to 28%, i.e. 40% relative increase and there remains a £1m allowance at 10%. So the first £1m is unchanged and a marginal rate of 20% is only fully felt at around £3m, whereas previously it was at infinity (!)
– there are many generous ways to mitigate CGT in the UK (angel investment, roll over relief) or, on the current rules, the entrepreneur can become non resident and sell up after a period, usually five years, with no UK liability (fewer, under a double tax treaty with the right jurisdiction).
I am sure the US fund you know has stopped investing – the UK VC market is dead right now, only pure SaaS businesses with 100% CAGR in revenue are getting finding – but it is not because of tax. It is because Europe’s economy is fucked by US policy (Russian sanctions, US reshoring, US LNG exports, US tariffs).
Also, a lot of UK investing by volume of deal was in the fintech bezzle economy. And these deals were often late stage unicorns so it dominated by value too. The UK has been a terrible place for deeptech investmg for years!
Revenant: And the 28% rate on carried interest was put in place by George Osborne in 2015!
Ah, I didn’t know it was Osborne. Thanks for the info. All I knew was one of the general partners bitching about it and blaming it on Two-Tier Keir. Although the edict came down principally from one of the managing partners in California who’s also a Trump supporter and wouldn’t like the Starmer government on that basis, either. However, you also write —
Revenant: … entrepreneurs may dislike the CGT charge increasing on sales of shareholdings but the increase is only from 20% to 28%, i.e. 40% relative increase and there remains a £1m allowance at 10%.
Only from 20% to 28% and 40% relative increase. Only! I assume you’re being funny. Also —
Revenant: So the first £1m is unchanged and a marginal rate of 20% is only fully felt at around £3m.
A carry of less than $10-15 million is a sum these guys probably wouldn’t get out of bed for.
No, I am being serious. An 8 percentage point increase in CGT is trivial. If you have a 15m carry opportunity, paying a theoretical extra 1.2m of tax is irrelevant in your decision making, when there are multiple legitimate ways to defer or relieve that tax entirely. If the UK was not half the EU VC market, I might believe that they have better relative opportunities elsewhere but it is and they don’t.
Thatcher and Lawson aligned capital gains and income tax in the 1980’s, to avoid arbitrage… at 40%. If it was good enough for Mrs T, it should be good enough for VC.
The rate of CGT on profits from land is 28% as well and you don’t see property investors refusing to invest in Britain.
I think your friend doth protest too much. They are not investing in the UK because either they have run out of money (in that fund) entirely or all the UK assets flamed out and they are allocating the follow on reservation to EU ex-UK (or their other markets are doing so badly they have allocated UK follow on to rescue them!) or they were solely focused on late-stage bezzle opportunities and the lack of any exit potential for negative unit economics deals, SPACS and crypto scams has killed their appetite.
Revenant: they were solely focused on late-stage bezzle opportunities and SPACS and crypto scams
None of that. To their credit they’re real deep tech. I don’t suppose it’ll hurt to say it’s this outfit —
https://www.dcvc.com/
Interesting. I don’t know them at all but I know several of their portfolio companies – as the better funded competition to our EU-based companies or deals we researched but didn’t do.
However, I don’t think any of their deals publicised are UK deals and they don’t disclose a Lo son office so I still think their comments about UK CGT are just playing to the gallery. They have no skin in the UK game and want to discourage USians from taxing capital.
Interestingly, the real plutocrats – Elon etc – could vote for high CGT rates and win popular acclaim and lose nothing because:
1) they can borrow against their listed holdings to fund their lives and
2) corporate taxation in most countries provides relief from tax on gains from the disposal of subsidiaries.
The net result being that a holding company does not pay CGT and the funds can be extracted by the individual owner borrowing against the holdco value.
VC’s do not typically hold their carried interest in fund partnerships through corporate vehicles because there is usually no relief / limited relief on the disposal of minority stakes in companies. The relief is usually targeted at trading companies with material ownership by another company, e.g. minimum 10% holding in UK. Partnership taxation works on the basis that the partners have a proportionate interest in all the assets of the partnership. So a carry partner in a $bn fund with 1% will, crudely, be ascribed an interest in a portfolio company’s shares equal to 1% of value in excess of 2x entry valuation of any asset (the 2x comes from entry cost plus 6% minimum rate of return before profit share). That means that a $10m investment into a $100m company is a 10% stake for the fund but 0% for the carry partner. If it sells for $1bn, the exit value to the fund is $100m and the 1% carry on the $80m excess over $20m equates to a $0.8m value carry which is 0.8% of the $100m share block sold and therefore equivalent to a 0.08% stake in the company sold. As you can see, the fund would need a very large holding in a portfolio company or an amazing multiple of return on a large holding for carry partners’ putative corporate holding vehicle to attract CGT relief. Private equity funds tend to own 80-90% of the target so a corporate carry vehicle may work for them. However, the carry partners have minimal control over their value, the fund controls the actual shares that the partners have interests in and so the other part of the trick, of borrowing against these shares, is harder for carry partners. If you cannot extract the sheltered gains efficiently by borrowing – god forbid, you pay income tax on the dividend – then a corporate holdco is of no use.
It would therefore be the funniest move of all, Trump selling out Silicon Valley with high CGT rates on individuals, as a human shield between the robber barons and the mob!
I agree. My natural inclination is to investigate underlying processes that make UK mean figures give an overly optimistic view of the country which would be exposed if we looked at medians etc.
My phone clearly listened to me and I was suggested a youtube video purporting to explain why the typical UK high street has a number of nail salons and barber shops that is objectively WAY too much, given demand. The answer was money laundering. HMRC can’t quantify the service and most business is via cash. My barber (who spotted my long COVID via a 50p piece sized alopecia area 6 weeks after my first terrible infection) said stuff I can’t repeat but which is not inconsistent with this allegation.
The “ridiculous number of barber shops” thing turns out to be not just Nottingham….. it’s all over the country. I know my national income accounting and this does not make sense. For those who delight in predicting how low the UK might fall, maybe look at southern Italy rather than Argentina.
Germany too has nail bars – usually Vietnamese and ever increasing number of barbers – usually Turkish but Syrian too with lavish fittings and great chairs
I presume immigrants need to show employment for visas so borrow from the mosque to build micro businesses – or simply charge fees to create shadow jobs for immigrants
Not sure how they handle National Insurance though
have you looked at the rest of the E.U.? they are all the victims of the towering intellectual clintonite/blairite mental midget type of governance, that simply cannot fathom that financial products is not real production. but simply backed by nothing bubble generators.
and scoffed at real production which is wealth.
i really see no way out for the west to recover till finance becomes nationalized for financial service for production, all business to be coop’s and worker owned. no stock markets. become food self sufficient, and above all, no free trade agreements. buy what you have to, sell what you can. encourage foreign products be made in your local market.
free health care, free housing, robust cradle to grave system.
we just saw how well the E.U. is working, when romania wanted to chart their own course.
Amen!
Bill Mitchell has an interesting entry on his blog about the UK and the deal with the IMF in 1976
https://billmitchell.org/blog/?p=33907
Thank you. An interesting read. I have only skimmed but there is at least one correction that needs making. The UK had quite stringent exchange controls already in 1976. If my memory serves, the investment dollar premium went to 100% (i.e. to buy foreign currency to invest abroad, a UK resident had to pay £2 in order to have £1 to invest). If the IMF made any stipulation about exchange controls it must have been with reference to additional controls. Exchange controls on outflows remained in force until 1979 when they were abolished completely.
Serving in a very junior capacity I was ‘there’ at the time. It is a somewhat unnerving experience to read something nearly half a century later and realise that one was personally involved!
If I have time and energy (I am an old man) I may read more carefully and comment further.
Many thanks for this insight. Exchange controls were relaxed and scrapped in 26 October 1977, 1 January 1978, 12 July 1979 and 23 October 1979. Almost everyone recalls what happened in October 1979, but not the reforms which ante-dated it. The relaxation under Healey was not part of the IMF deal, but the IMF deal and the advent of North Sea oil production in 1976 led to the appreciation of sterling and so put pressure on the Treasury to change the exchange control regime, so that there would be an outflow of funds in order to moderate that appreciation. Ironically (in view of the subsequent history), some of the pressure for this came from the TUC, although some on the Left, such as Jack Jones and the Cambridge Applied Economics unit under Wynne Godley argued for the introduction of import controls. There is a detailed recent discussion here: https://global.oup.com/academic/product/governing-financialization-9780192897015?cc=gb&lang=en& (esp. pp. 91-100 for the relaxation/abolition which occurred under Labour).
Wynne Godley lectured me when I was at Cambridge. Most of us remarked on his slightly eccentric style of teaching but I (though not at that point understanding the stuff he subsequently became famous for) spotted that he was asking questions of us that were intended to make us think of how things REALLY worked rather than “what do I need to know for the exam?”
That must have been a great privilege, as he is one of my heroes, and a very civilised, as well as civilising, man – indeed, and as you may know, he came to economics via music. Shortly before the end of his life he produced the following work which aimed to demonstrate in a single volume just how the system actually worked: https://link.springer.com/book/10.1007/978-1-137-08599-3 (with its stock flow consistent modelling). Although I had read some of his opinion pieces in the 1980s, I only really came to his work via the papers he wrote whilst he was at the Levy Institute of Bard College.
This was effectively a return to work he undertook at Metal Box and in the Treasury during the 1960s, when he tried to produce a model of how every part of the economy interlinked. Here is his biography: https://link.springer.com/book/10.1007/978-3-030-12289-8. There is also a chapter on him by Lavoie and his erstwhile Cambridge Applied Economics colleague, Francis Cripps, in the second volume of the Palgrave Companion to Cambridge Economics (2017): https://link.springer.com/book/10.1057/978-1-137-41233-1?page=3#toc. When re-reading his letters and commentary in British national newspapers a few years’ back I was struck by his prescience and the almost uniform accuracy of his predictions.
The great tragedy of his life (over and above his personal travails, including his manipulation by an infamous psychiatrist, Masud Khan, which he revealed in the LRB in 2001) was the destruction of his applied economics unit at Cambridge under the cover of Mark Carlisle’s 1981 cuts to the higher education budget. That unit had been widely perceived as being much too close to the Bennite wing in the Labour party and the AES, so the ending of the unit was considered an act of spite.
Wynne Godley was a trained musician. His prescriptions were outside the Overton Window…..but I suspect some forms of import restriction such as motor cars might have served Britain better……..then again Max Beaverbrook wanted Imperial Preference in 1930s and even stuck Britannia on the Daily Express masthead…….
https://en.wikipedia.org/wiki/Max_Aitken%2C_1st_Baron_Beaverbrook
Actually reading this Wiki article shows how relevant much of his thinking 100 years ago is to current situation in UK and Canada
The IMF deal, which drove austerity, was done just before the flow of North Sea Oil was about to start filling the government coffers. The 1976 deal and the austerity of the Labour right-wingers (Healey and Callaghan) lead straight to the “Winter of Discontent” and the election of Thatcher. And so the oil revenues were squandered on tax cuts rather than being invested in infrastructure and perhaps a sovereign wealth fund.
So much of the UK oil was sold off at the rock bottom prices of the 1990s, just like the UK gold reserves were sold at the market bottom.
Eventually, all Ponzi schemes fail.
In spite of all this, Keir Starmer still knows what his priorities are – the Ukraine. He is getting ready to travel to that country to discuss the possibility of deploying a post-war peacekeeping force there and just had a meeting with Macron about the same. The UK’s economy must be going great if he thinks that the UK can afford to send a chunk of their military there. You know, Starmer has a lot in common with Biden. No matter how bad conditions became in their own countries, their number one priority remains the Ukraine. And I suspect that even with all those budgetary pressures, that resources are still being sent by Starmer to the Ukraine. If he keeps this up he may face the same fate as William Wallace. The man is a disaster for the UK.
Please drop the 1976 distraction which was a re-run of 1931. It was a Treasury Scam based on fallacious numbers and an IMF Team headed by Derek Maugham who went on to head JPM. He like the rest of the team was ex-HM Treasury
It was a ploy by Healey to force Wedgwood Benn et al to bow to his will. Upshot was Healey never became Leader and the massive cuts on capital expenditure caused Water Privatisation because of accumulated failures to invest in infrastructure.
As for Reeves I know her Typus first hand. Oxford owned its doors to gender balance and made Oxford the easiest university in U.K. to access for women. The quality of female undergraduates plummeted as a doctrinaire cohort felt they were superior. Coupled with a 1 year Masters at LSE which was 2 years in quality era – she entered BoE which is a low paying job in London when hi-flyers go Consulting or Banking.
Her sister has Ann Cryer as mother-in-law. Same Ann Cryer that battled Bradford Council over Grooming Gangs in 2004. Rachel from Accounts is on a powder keg which is why I expect Starmer gone by year-end and Reeves too as Labour Revolt turns
I hope you are right!
I applied for a graduate job at the BoE when I briefly lost my presence of mind. There was a classic civil service faststream assessment. I had to do an intray exercise in prioritisation of tasks. And then write a briefing on dealing with the Baltic gold. I recommended we compensate Estonia for the seizure. Reader, I did not get the job.
I had never met a more cast iron set of prejudices about how the world and economy works though. They had no interest in the nature of money or the role of energy in the economy, both of which fascinated me. It was a close shave on both sides!
Exactly: Callaghan, Healey and Wass needed to crush the incipient AES (see here for a recent discussion: https://renewal.org.uk/archive/vol-30-2022/exorcising-the-ghost-of-the-alternative-economic-strategy/). In effect it was a Pavlovian reaction against the failures of 1974-76 when Wilson (with Healey) had bought off the unions and believed that the UK needed to help maintain global demand. The harsher Bill Simon became the more it gave Callaghan and Healey political cover for hard retrenchment.
Carter adopted a similar approach to that of Labour in 1974-76 during 1977-78 (Carter following Lawrence Klein’s ‘locomotive’ theory), which resulted in a similar smash-up in 1978-79, ‘necessitating’ the appointment of Volcker. Both Callaghan and Carter were flailing around, trying to restore the good times, which had vanished forever in 1973.
The IMF settlement set the terms of the wage suppression of 1976-78 which resulted in the ‘winter of discontent’. Carter’s abandonment of the locomotive theory led to a profound recession. Both decisions set a new neoliberal paradigm (though Carter had been strongly favourable towards deregulation from the start of his administration), and both amounted to a form of political self-sabotage for the Labour and Democratic parties, ultimately leading to their hollowing out from the late 1980s.
https://global.oup.com/academic/product/decline-to-fall-9780199534746?q=decline%20to%20fall&lang=en&cc=gb and https://yalebooks.co.uk/book/9780300057287/goodbye-great-britain/. Wass was, of course, at the centre of events, so his account may be viewed by some as an apologia, but actually it is a shrewd, detailed and objective account. Cairncross remained very close to many Labour ministers, whilst master of St Peter’s, so his account (with Kathleen Burk, now doyenne of the study of Anglo-American relations) also has some of the marks of an insider.
I thought „Locomotive Theory“ founded onnHelmut Schmidt refusing to run trade deficits and Getmsny‘s guaranteed trade surpluses from 1952 London Agreement
Yes, it had a great deal to do with the truculence of Germany and Japan. When Carter came to office the worst of the recession had passed, but inflation and unemployment were stubbornly high (in striking contrast to the sharp but brief recessions of the 1950s) and Henry Owen remarked that “stagflation may not pose as dramatic a danger as the Great Depression in the 1930s, but it could eventually do as much to weaken moderate political forces in Europe and Japan, and thus to unhinge the existing international order.” Michael de Groot has described it as follows: “[it] called for West Germany and Japan to join the United States – all countries with relatively low levels of inflation – to expand their economies so that the weaker industrial democracies and developing countries could benefit from an external stimulus without having to abandon their anti-inflationary policies at home.” (https://www.cornellpress.cornell.edu/book/9781501774119/disruption/, at p. 110, the best recent discussion). Mondale and Fred Bergsten pressed the theory onto Schmidt and Fukuda during the spring of 1977, and especially at the G7 summit in London in May 1977, but to no avail. Carter remarked that “with 7 percent unemployment [in the US] it is difficult to explain a $25 billion trade deficit to Congress, especially while the Germans have a $9-10 billion surplus”. An increasingly prickly Schmidt responded that West Germany had contributed to the recovery by means of a two thirds appreciation of the DM since 1970. Brzezinski said that the Japanese were “derelict in meeting their international responsibilities in the economic field” and that they offered “cheap palliatives which will get us off their backs for a while in hopes that some other issue will divert our attention.” Economic relations between the US and West Germany/Japan under Carter deteriorated (Schmidt came to have a visceral loathing of Carter, and there is useful commentary on the acrid relationship here: https://global.oup.com/academic/product/the-global-chancellor-9780198747796?cc=gb&lang=en&#). All that meant Carter felt constrained to expand the US economy in 1977-78, resulting in the degringolade of 1978-79, and with Schmidt and Volcker coming to stand in the same relation to the US as Bill Simon did with the UK in 1976. The road to hell is paved with good intentions…
This, for my money, is also a very useful summary of Carter’s attempt to imitate Icarus in the economic sphere: https://yalebooks.yale.edu/book/9780300171501/pivotal-decade/. A number of economic historians, such as David Edgerton, are now very much of the view that it is necessary to look deeper into the 1970s as the basis of our present predicament: in other words, there was a turn to neoliberalism, even by some social democratic governments (in despair at the apparent inefficacy of ‘neo-Keynesian’ methods) in order to return their societies to the lost state of grace prior to 1973, and there was also an increasing realisation in 1976-77 that this meant reversing the corporate profits squeeze which emerged from the mid-1960s so that there would be more space for investment in innovation and productivity growth which would then permit a reversion to the status quo ante OPEC1.
Thank you, this is a fascinating insight.
I do agree that the 1970’s were a key time in global economic history. Somehow, all the good work of the post war years either came undone (and we often forget just what an economic and social miracle the quarter century after WWII represented in most countries), or problems suppressed in the post war agreements raised their ugly heads.
In that quotation you have elucidated why West Germans felt successfully affluent after decades of modest improvement. Currency Appreciation the rewards to Labour and a blight on Capital in terms of exports – though with higher real wages importing food and leisure from French Franc and Italian Lira and Greek Drachma and Spanish Peseta – Germans could import so advantageously and even acquire new subsidiaries.
The Euro was how this was reversed following Anschluss with GDR in 1990 – and the gains of Labour were reversed and Capital increased its share of GDP until wealth inequality showed Germans to be some of the poorest in Asset Terms in whole of Europe
The Bloomberg headline reads “Bond Selloff Puts Reeves’ Economic Project on the Brink”
Reeves has an economic project?!
Sue Gray drafted the former head of the Treasury growth unit (Ravinder Athwal) to draft the growth section of Labour’s manifesto. It wound up being the hold in the centre of the doughnut. Essentially, it comprised: (i) gutting the planning rules (Silkin’s 1947 Town and Country Planning Act); (ii) delegating the government’s thinking to a panel of establishment economists (essentially a revival of Snowden’s Economic Advisory Council of 1930 and the Neddies); and (iii) ‘encouraging’ pension trustees to invest domestically. That was it.
Thus Labour and the civil service were at one in having absolutely no meaningful growth plan whatsoever, though Labour had had 14 years (or five years from the deposition of Corbyn) to generate one. Alas, Starmer is notably – and in opposition was notoriously – uninterested in the formation of the economic policy on which the fate of his government depends. There is little evidence that Athwal’s successor at the head of the growth unit (Tamira Mander-Lynskey) is any more imaginative. The Tories and Reform, fixated on supply side cliches, are no less intellectually bankrupt.
Maybe the UK is getting what it deserves, per de Maistre.
This is the best study of the largely futile Economic Advisory Council, which I strongly suspect none of the officials responsible for creating the new council of economic advisers (under John van Reenen) has read:
https://www.cambridge.org/core/books/economic-advisory-council-19301939/20512C7C8A05CEADE40EED9BF60B38E3
Given the chancellor already has an EAC anyway, it seems all pretty performative, even if the CEA has a specific ‘growth’ brief.
I also suspect that officials have not read any of Jim Tomlinson’s numerous works since the early 1980s on growth-as-panacea, summarised here: https://www.historyandpolicy.org/policy-papers/papers/never-having-it-so-good-in-the-twenty-first-century.
Tamira Dawn Lavinia M-L indicates on LinkedIn she is looking for a new job. Looking at some job description for this department I can see it is another bran tub with no real core or authority
Well, if you’re going to descry grammatical errors I winced at the Bank of England towing the line rather than toeing it, but I fear these days AI is more likely to be correct than anyone who passed through the education system less than fifty years ago.
And the simple past of to sink is sank. It is a strong verb! Sink, sank, sunk(en). Sink, sank, gesunken to Germans.
I don’t get the mechanics here.
The government controls the interest rate on bonds. The currency is floating. It might go down, but this causes UK assets and exports to become more attractive, so is ultimately self limiting.
Or does the UK (it’s government, banks, or it’s population) have a large debt in a foreign currency it is not able to acquire in the open market?
Problem the that UK imports too much, and exports too little, A Weaker currency just increases inflation more than you gain from exports.
Much like the US….Except the US has a navy and an air force so the game can go on a little longer.
free trade is austerity, it drives down wages, increases poverty and debts, which becomes unmanageable.
There is no foreign debt to speak of. The banksters are trying to do to Starmer/Reeves what the BoE did to Truss/Kwarteng. Since they both have a similar level of understanding the banksters may succeed.
Has anyone seen Wes Streeting in the City lately?
Crisis = opportunity. If Reeves had a heart and a brain, she would see the banksters and raise them. Aggravate the crisis and then ram through reflationary, redistributionary emergency powers.
We had to kill the banks to save them. :-)
We had to kill the banks to save them.
I like it.
Clear you have no credibility on Economics nor any grasp of international finance and sound like a fringe politician
I am astounded at the level of incomprehension here !
London is THE global centre of ForeX trading
It has a major financial centre
It has therefore immense financial flows in multiple currencies
It has major oil and consumer goods corporations operating globally and funding in multiple currencies
It has a government with one of FOUR major currency blocs on the planet – EURO YEN DOLLAR STERLING
Is it so hard to conceive of Asset/Liability Matching on Balsnce Sheets or Portfolios in Asset Management ?
I had assumed a basic economic understanding on the blog
So you think it’s just normal trading? The media is revving up a crisis out of nothing?
Richard Murphy [youtube] thinks the BoE is deliberately trying to cause a recession by selling bonds unnecessarily.
I don’t see the point you are making.
What phenomenon under discussion is asset/liability matching driving and how?
Britain has a much more open economy than US and imports food and raw materials and now natural gas and electricity. It has huge foreign currency denominated liabilities so its assets and liabilities are matched through floating exchange rates and base rates.
It runs the biggest trade deficit on earth after USA
Reeves has public spending plans she wants to fund from payroll taxes and yet expects economic growth
Bond traders question her logic as demand implodes and cost push inflation increases causing Stagflation
The UK has almost no foreign currency *liabilities* as a state. UK households and corporations have foreign currency expenses and revenues: talking about asset and liability matching is muddled.
The UK trade deficit means that they are net buyers of foreign currency and sellers of sterling. The balance has to be met in the sale of sterling financial assets (equities, government and corporate bonds, bank balances) and land.
If foreign buyers demand a higher yield on these sterling assets in their domestic currency terms, these sterling price of these assets needs to fall (bonds, equities, land) or bank interest rates need to increase (pushing up private sector sterling borrowing costs to compensate). A fall in the value of sterling is not enough: it will not increase the yield in foreign currency terms (it reduces the cost to purchase and the value of the returns).
Regarding land, residential property prices are driven by demand from UK residents and immigration is deliberately keeping these prices high.
Share prices have to fall for yields to rise. UK domestic share ownership is rock bottom, foreign buyers are the London market, so one would expect rapid transmission of external yield requirenents. The FTSE indices have not fallen sharply so this does not suggest foreign buyers are demanding higher UK yields.
Bond yields for UK corporate borrowers do not appear to have risen sharply either.
The action appears to be in UK government bonds. The price of UK government bonds, given quantitative easing etc. is basically set by the Bank if England’s actions and inactions. So why are rates being allowed to rise, when the country needs a massive programme of supply side investment to improve productivity in every sector? Interest rates cannot fight imported components of inflation, except through currency strengthening – all they can do is reduce domestic components of inflation by destroying demand. Interest rates would have to be a lot higher to raise sterling by 20% against the dollar and mitigate energy price increases. So what is the point of the current high interest rate policy?
BoE could simply reduce interest rates generally (and to reduce asset price inflation and direct investment towards infrastructure and house building rather than house trading, reintroduce credit volume rationing e.g. for mortgages).
We could also cut immigration to near zero and reduce land prices and pressure on public services.
Interest on overnight reserves is a huge payment to the banking sector of £50bn p.a. which Reeves could use to deliver her budget. Taking away interest on overnight reserves with the great quantity of reserves in the system would have an uncertain effect. Could the BoE/HMG absorb those reserves by forcing UK banks to hold more gilts? If there was no new issuance, that would drive down yields.
Reform stood on a manifesto to remove interest on overnight reserves in the recent election. It also proposed to reduce immigration. It didn’t set out
supply side reforms or credit policies but I think it is only a matter of time.
Cui bono from BoE pretending it cannot control price of HMG borrowing or cist of funding to different economic activities?
But none of this is asset/liability matching.