EU referendum aftermath

[John McKenna]

Here's another view -

Why the dramatic fall in sterling is a cause for celebration - not depression...

The UK's exchange rate rose massively during the 1980s, and again towards the end of the 1990s as we started selling off UK assets on a scale unmatched anywhere else in the world. Having been at $2.00 to the pound for most of the 2000s, it dropped to $1.50 between 2007 and 2009, and drifted up again - until the Brexit vote. While all this was going on, economies in the Far East devalued their currencies, reducing their costs on world markets, leaving themselves with a massive competitive advantage.

Very few UK manufacturers involved in internationally traded goods could survive in these circumstances - and they didn't. As a result, the proportion of GDP coming from manufacturing in the UK fell from almost one third as late as 1970 to barely 10% now... investment as a percentage of GDP fell too. Whereas the world average physical investment as a percentage of national income is 26% - and nearly 50% in China - in the UK it has fallen to a pitiful 13%.

And because we produce so few goods, we cannot pay our way in the world. Even now, despite the way we have treated manufacturing, well over half our exports are goods rather than services. The last time we had a trade surplus was 1983 and our overall balance of payments has been in the red every year since 1985. What has filled the gap? Endless borrowing and asset sales.

As a nation, we used to have more overseas assets than liabilities. No longer, which is why our net income from aboard, which until recently was about £20bn per year positive, is now around £40bn negative... the government, as well as the country as a whole, is running up debt at a frightening speed.

Partly as a result of our rapidly increasing population we have had some growth recently... it has not been driven by, as it should be, by net trade - exports minus imports - and investment. On the contrary, it has largely been financed by equity release and stock exchange and stock exchange and house price inflation, as asset prices have rocketed on the back of ultra-low interest rates.

And why do we have these conditions? Because foreign payments deficits suck demand out of the economy, which has to be replaced - by the government, consumers, businesses, all three at the moment, spending more than their incomes.

So we bought our high exchange rate at a very high price, although perhaps the biggest cost is still to be fully recognised.

The effect of an over-valued exchange rate is not particularly disavantageous for the service economy, which is not very price sensitive... Where the shoe really pinches is in our erstwhile industrial areas where good blue-collar manufacturing jobs now barely exist. The other huge consequence of too strong a pound is massive inequality, a deeply divided country and the benefits of globalisation spread so unevenly across the UK as to present a major challenge to the country's political stability.

Since the Brexit vote, sterling has dropped by rather more than 10%. Not enough - but heading in the right direction if we are serious about having a viable and sustainable future.

(John Mills, founder & chairman of JML, City AM, 7 Oct. 2016)

[Paolo Casaschi]

If it is true I am poorer, but the only way I can tell that is that some guy on a forum won't stop banging on about it, why should I care?

Of course you should not.

However, while I'm just some guy on a forum (apologies, I'll try to have the head of the Bank of England read your posts here and address your concerns directly), I'm certainly not the only person in the UK concerned about the extreme vulnerability of the British pound at this point. In fact this discussion started with you complaining about the obvious bias shown by the BBC financial commentators in an article I linked. Then when confronted with the opinion of the head of the Bank of England, you did not show much appreciation for him either. Do I see a pattern here?

[NickFaulks]

Then when confronted with the opinion of the head of the Bank of England, you did not show much appreciation for him either.

As a matter of fact, when it comes to the good of the common man I do to tend to be wary of the motives of Goldman Sachs partners. This is born of long experience. However, in this case you are also saying, albeit with reasons different from mine, that he is quite wrong. We believe that price inflation is a serious threat ( you think now, I think down the road but we need to address it now ), he says not, and in fact he is trying to nurture it.

[Paolo Casaschi]

We believe that price inflation is a serious threat ( you think now, I think down the road but we need to address it now ), he says not, and in fact he is trying to nurture it.

You are mixing things here: managing inflation is a strategy; leaving the pound in uncontrolled freefall and hoping everything is going to be fine is not a strategy.

[MartinCarpenter]

? Doing nothing for the moment is always a strategy Often a good one when you're not sure as every action tends to have consequences in all directions.

Even if the central bank could somehow theoretically prop up the pound at its pre brexit levels, its hardly automatic that they should try right now if some correction is going to be an inevitable medium to long term consequence of brexit.

[Paolo Casaschi]

? Doing nothing for the moment is always a strategy Often a good one when you're not sure as every action tends to have consequences in all directions.

Even if the central bank could somehow theoretically prop up the pound at its pre brexit levels, its hardly automatic that they should try right now if some correction is going to be an inevitable medium to long term consequence of brexit.

This goes back to the point that the freefalling of the pound is a disaster and we might have to leave with it for a while as part of the consequences of brexit. My point all along in this discussion.

Very different from saying that the devaluation of the pound is actually good for the UK, that all you read in the mainstream news is some sort of "Goldman Sachs conspiracy" lead by the top guys at the BoE (paraphrasing this since I'm not really sure I got this right) and everything is going to be fine somehow (even if nobody really knows exactly how).

[NickFaulks]

Even if the central bank could somehow theoretically prop up the pound

Why are we even discussing "propping it up"? They've been kicking the s**t out of it, first by talking it down before and after the vote, then by quite unnecessarily cutting interest rates and printing yet another £60bn.

[NickFaulks]

http://www.telegraph.co.uk/business/201 ... n=DM169778

I'm not always a fan of the IMF, but I do respect Ashoka Mody a great deal. The IMF rescue of Ireland, which he oversaw, was largely successful, even if his bluntness did get him into trouble with his bosses.

‘fair value’ for sterling is around $1.10 against the US dollar, implying a further fall of around 11pc. “There is some likelihood that it is will overshoot and reach parity, but my reaction as a policy-maker is to ask ‘what’s the big deal?'.

History is going to judge that Brexit at last broke the political-economy lock of a British elite wedded to banking interests, even if it happened completely by accident

Right on! Might I one day live again as a citizen of an independent nation which is not totally reliant upon a bloated and corrupt financial sector?

Lord King of Lothbury always used to be a sensible chap until he ascended to the BoE governorship, from which point he did everything wrong. Since he left the post, he has been saying "they made me do it", although how that can happen under an independent regime is unclear. Nonetheless, he now evidently feels free to revert to simple good sense.

During the referendum campaign, someone said the real danger of Brexit is you'll end up with higher interest rates, lower house prices and a lower exchange rate, and I thought: dream on.

Because that's what we've been trying to achieve for the past three years and now we have a chance of getting it."

"I don't think we should fear [Brexit]. It's not a bed of roses, but nor is it the end of the world.

Finally

Britain was borrowing 5pc to 6pc of GDP a year to buy imports and live beyond its means. The strong pound was great if you wanted to buy a Mercedes Benz or take a holiday in Spain, but the prosperity was an illusion, borrowed from the future.

Paolo, he's talking about you. I think he's saying "hard luck".

[Paolo Casaschi]

During the referendum campaign, someone said the real danger of Brexit is you'll end up with higher interest rates, lower house prices and a lower exchange rate, and I thought: dream on.

Because that's what we've been trying to achieve for the past three years and now we have a chance of getting it."

"I don't think we should fear [Brexit]. It's not a bed of roses, but nor is it the end of the world.

Finally

Britain was borrowing 5pc to 6pc of GDP a year to buy imports and live beyond its means. The strong pound was great if you wanted to buy a Mercedes Benz or take a holiday in Spain, but the prosperity was an illusion, borrowed from the future.

Paolo, he's talking about you. I think he's saying "hard luck".

Possibly.

In fact, the only situation where devaluing your own currency makes sense is when the a country has been living far beyond their means and it's necessary to accept a lower standard of living. For example the situation in Greece.

This is however very very very different from your initial stance on the subject: "the loss of value of the pound is irrelevant and everything is going to be fine". If you were honest, you should have said: "The UK has been living beyond our means for too long and some kind of disaster is going to happen eventually, we might as well make it happen faster with brexit".

The brexit referendum campaign went a long way to deny any financial concerns expressed by the remain campaign; now you are telling me that lowering the standard of living in the UK is a necessity and brexit only makes this happen faster? Are you telling me that the expectation of increasing wages and raising standard of living for the average Joe (because of lower/controlled immigration) was just a pipe dream like the 350 millions to the NHS? After all the strong pound was also good for those buying a FIAT 500...

[Paolo Casaschi]

Britain was borrowing 5pc to 6pc of GDP a year to buy imports and live beyond its means. The strong pound was great if you wanted to buy a Mercedes Benz or take a holiday in Spain, but the prosperity was an illusion, borrowed from the future.

Paolo, he's talking about you. I think he's saying "hard luck".

As I pointed out in the earlier post, I do not see why mentioning only a Mercedes while the cost of any car is likely to be impacted. Moreover, the impact of the personal finances for someone buying a Mercedes is likely to be (percentage wise) a lot less than for someone buying a FIAT 500.

As far as the holidays abroad, that impacts me but I'm not alone, from this government report "there were 32.2 million holiday visits [abroad from the UK] in 2015". If now a significant portion of those will have to stay home in 2017, that's lowering the standard of living for a vast portion of the population, not only the odd foreigner.

He might be talking about me, but I'm certainly in a very large company.

That also makes me think, who will benefit from all this?

Even assuming that a lower pound will suddenly create a UK manufacturing business out of nothing and assuming that the trade tariffs following brexit will not kill that growth before it even takes off, who will actually take on those new manufacturing jobs?

Certainly not foreigners, we clearly do not want them to pollute the UK job market.

UK unemployed people will definitely run to this opportunity, however unemployment in the UK is down to an historical low: 4.9% unemployment in July 2016 is dangerously close to the rate where only the people that do not really look for a job are counted. Even more so if you account for the foreigners inevitably leaving the country. Even more so if you think that UK people will probably dislike the low wages that are necessary to keep the competitiveness of the newly re-energized UK manufacturing business. For comparison, when Greece contemplated exiting from the Euro (with the intention of devaluing their own currency to boost the economy) their unemployment rate approached 30%.
I know nothing about economy, but I do not see who's going to take up those low paid manufacturing jobs... unless things are going to get a lot worse before they'll get somehow better, a far cry from "everything is going to be fine".

I'm afraid that for a lot more people in the UK your initial "everything is going to be fine" is going eventually to turn into "hard luck".

[NickFaulks]

Paolo, if you are so convinced that Prof Mody has it wrong, why don't you write to him? I believe he is the sort of person who would reply, and he doesn't need me to defend him.

http://scholar.princeton.edu/amody/contact_owner

[Paolo Casaschi]

Paolo, if you are so convinced that Prof Mody has it wrong, why don't you write to him? I believe he is the sort of person who would reply, and he doesn't need me to defend him.

http://scholar.princeton.edu/amody/contact_owner

I'll wait first to read the response of Mark Carney to your letter about your concerns with the BoE policies and why they should not be so worried about the freefall of the pound.

In the meantime do you agree that you should correct your stance from "the loss of value of the pound is irrelevant and everything is going to be fine" to "the UK has been living beyond our means for too long and some kind of disaster is going to happen eventually, we might as well make it happen faster with brexit" ?

[NickFaulks]

Paolo, if you are so convinced that Prof Mody has it wrong, why don't you write to him? I believe he is the sort of person who would reply, and he doesn't need me to defend him.
http://scholar.princeton.edu/amody/contact_owner

I'll wait first to read the response of Mark Carney to your letter about your concerns with the BoE policies and why they should not be so worried about the freefall of the pound.

You're missing my point. I have held conversations with MPC members in the past, and shall doubtless do so again. They naturally tend to become more interesting after they leave office, although that was not so true in the past, when less strict discipline was imposed. I shall not write to the present Governor because I have no wish to receive a standard boilerplate response from his office which refers me to some specious jargon on the website. Would you expect the same from Prof Mody? If so, I think you are wrong.

Please stop putting quotation marks around your own words to make it look as though I wrote them. It is neither clever nor helpful. If you can find things I have actually said which are mutually inconsistent, do post them.

[Paolo Casaschi]

Please stop putting quotation marks around your own words to make it look as though I wrote them. It is neither clever nor helpful. If you can find things I have actually said which are mutually inconsistent, do post them.

Let me correct my question then, do you agree with my own summary of some of the references you quoted: "the UK has been living beyond our means for too long and some kind of disaster is going to happen eventually, we might as well make it happen faster with brexit" ?

[NickFaulks]

Let me correct my question then, do you agree with my own summary of some of the references you quoted: "the UK has been living beyond our means for too long and some kind of disaster is going to happen eventually, we might as well make it happen faster with brexit" ?

First of all, you evidently slaver over the keyboard whenever you type the word "disaster", but I cannot find that, or anything resembling it, in any of my references.

The Western world, not just the UK, has been living beyond its means for a quarter of a century. More recently, this has been exacerbated by the cost of bailing out the banks from the effects of their own mistakes ( to be kind ). So yes, the assumption that we can all keep getting richer is no longer valid. For those not already rich, it stopped being valid some time ago.

To state the obvious, the best chance any individual economy has of pulling itself out of this hole is through real economic growth, hopefully assisted by social reform. In theory, the recent fall in the pound to ( Prof Mody would say towards ) a proper level, combined with losing the dead weight of EU membership, should bring competitiveness and economic growth in the UK sufficient to counteract the effect of higher import prices. It has done so before.

Europe, hamstrung by its absurd currency arrangements, has no such hope. It will take at least a generation for the Mediterranean countries to recover from >50% youth unemployment, and they haven't even started yet. In fact, they're still digging.