Coffee House

The IMF says it’s the Bank’s economy now

22 May 2012

When the IMF published a report into the UK economy last year, I wrote
a blog post detailing how it managed to please everyone: George Osborne,
Vince Cable, Mervyn King, Ed Balls, everyone. This morning, I’ve been tempted to just publish that post again — because the IMF’s "">latest report is basically the same. Osborne will be pleased with its emphasis on deficit reduction, including the line that ‘Strong
fiscal consolidation is underway and reducing the high structural deficit over the medium term remains essential.’ And he’ll also want to draw attention to its suggestion that the
UK’s weak growth is largely down to ‘transitory commodity price shocks and heightened uncertainty following the intensification of stress in the euro area’. Cable will approve of
its warnings about ‘tight credit conditions’ and its calls for further credit easing. For Mervyn King, there’s praise for the ‘bold monetary stimulus’ that is low
interest rates and Quantitative Easing. And for Ed Balls there’s a consolatory paragraph about how ‘fiscal easing’ — which is to say, temporary tax cuts and spending
increases — may help if the economy doesn’t pick up after all. Like I say, there’s something in there for everyone.

But, really, the most significant thing about today’s report is its emphasis on monetary policy. It doesn’t just approve of Quantitative Easing and low interest rates — it calls
for more. And so, ‘Evidence suggests that QE can continue to support demand by lowering long-term interest rates and improving banks’ liquidity.’ And, ‘The Monetary Policy
Committee should also reassess the efficacy of cutting the policy rate below its current level of 0.5 per cent.’ Only if these don’t work, says the IMF, should the Chancellor then
consider loosening his fiscal consolidation, so to speak.

This is only one report, to be ignored or heeded as you like — but there’s something significant about it nonetheless. Seems to me that the IMF are tacitly acknowledging that, when it
comes to our economic recovery, it’s Mervyn who’s in charge. Which is fine: we at the Spectator have previously called QE the ‘most radical economic policy’ underway in
Britain today. But, as I’ve
said before, it does raise questions about whether that policy
is being scrutinised properly.

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  • Philip747

    Salopian a quick Google reveals that Milton Friedman had suggested that velocity was a constant, but wrote many articles, some of which revealed a much more open mind on the subject. It was another world, with inflation several times going over 25%, which fortunately it is now hard to imagine, banks being told by the Bank of England where they should lend, and hire purchase being controlled by frequent regulatory changes in an attempt to manage consumer demand. Exchange control meant you could only take £25 cash on holiday, and I wonder whether this kind of limitation may come back to countries in the Eurozone?

    Turning the Economic Energy into physical activity providing employment and residential property is clearly preferable to leaving the liquidity trapped in the banking system-or as a fairly meaningless adjustment to the government accounts. Mr Osborne calling a takeover of a 9.5 billion deficit as a windfall was attempting to put lipstick on a pig. However if he directs that the proceeds of liquidating the assets is used to generate a 1.5% growth in GDP he may get (and deserve) another pat on the back from his friend at the IMF

  • Philip747

    Tom-tom the gilts problem for pension funds is not that they are forced to buy them, but that they have to value their liabilities (known in the jargon as “technical provisions”) by using a discount rate which has regard to the yield on gilts or more usually under international accounting standards the yield on corporate bonds.

    The lower the discount rate, the more money you need today to pay a given pension in the future.

    Lending money to a local authority or housing association to fund construction is nothing like a collateralised mortgage obligation which is the product of a greedy and probably dishonest banker. It is not suggested that pension funds replace building societies, which largely fund the purchase of existing houses, but rather that the money is used to fund construction of new dwellings, thus providing employment as well as increasing the housing stock — both desirable policy objectives.

  • Salopian

    Philip 747 : like ypu I was around the the late ’70s and ’80s. Afraid I don’t recall any notion that velocity of money was constant. On the contrary it seems tome that it’s variability and the mechanisms which controlled was one of the issue which concerned us all (especially at times of high inflation.

    Economic Energy (to coin a phrase) is a function of velocity of money and its quantity. If most of the movement is confined to the Financial Sector (Tom Tom 23.may 6.24am ) then that’s where the Economic Energy is confined- it has to be released into the wider economy. (Thatcher – a scientist by profession understood this even if she didn’t understand a lot else)

  • Salopian

    Tom Tom ; appreciate your comments about Merkel. My dealings with Germany ended in on my retirement in the mid’90s but I have no doubt that my experience is still relevant

    It seems to me there is another factor which everyone seems to forget. Germany is a federation and there is as much difference between individual Lande as there is across large parts of Northern Europe especially on socio-economic issues. Merkel has had an easy time in the good times – but is she able to impose her dirigisme (learnt in East Germany) in the hard times?

  • Sir Everard Digby

    QE – a ‘radical’ policy? Well I suppose it is but only as the elast bad option for the economy.

    Diluting debt and transferring it elsewhere are a workable policy of sorts.

    However, QE does clobber the prudent’s savings and rewards the incredibly less prudent. Those who created the problem in the first place now benefit from the solution -the rest of us do not.

    None of this helping to stimulate the economy.Government intervention never does.

    On reflection,it would have been better and truly radical to give everyone over the age of 50 a couple of million quid on condition they retired immediately and sold their homes.

  • TomTom

    “and the proceeds reinvested in funding housing association and local authority housing schemes,”

    How does investing pension funds in property markets resolve the problem of pension funds being forced into Gilts ? If they become PFI investors in housing stock they become more illiquid – if they become not owners but financiers they are simply buying CMOs.

    The Pension Funds are being invited to replace Building Societies. It is this Blairite blurring of demarcations that caused mess after mess. Why the Diageo pension Fund should become a social landlord is unclear – why Pension FUnds that already invest in PE and RE and PFI through intermediaries should want to have direct exposure because their ownership of Banks no longer serve the economy is surreal.

    This is really desperate stuff – next we will be asking Civil Servants to accept payment in IOUs linked to share prices of RBS and Lloyds.

    They have not a clue how to resolve a mess they have made much much worse since 2007. Who does the Government think will refinance UK banks if pension funds become even more illiquid ?

  • TomTom

    “we thought that the velocity of circulation was a constant “

    Then you were naive. It has never been constant. Currently it falls because the lIquidity is INSIDE MONEY which does not leave the banking system. Outside the Banking System credit is scarce and prices high so V slows.

    Everything is trapped inside the banking system which is propping up accumulated Bad Debts – this is Endgame – there is no way forward because the banks will take another 50 years to mark down bad debts.

  • Philip747

    The IMF have pointed out the need for growth, and have suggested further quantitative easing as a method of achieving this. Terry Smith of Tullett Prebon reminded us in his blog a few days ago that if one increases the money supply when there is a lack of confidence this may achieve nothing other than a slow down in the velocity of circulation. (When we were all much younger and Mrs Thatcher was first in Downing Street, we thought that the velocity of circulation was a constant and the monetary levers were much more powerful than they turned out to be).

    If quantitative easing doesn’t work what else can be done? It may be worth revisiting what Fraser Nelson in his budget review called the Royal mail pension trick.. Taking over a pension fund with a 9.5 billion pound deficit and calling it a windfall is clearly dishonest — Fraser Nelson called it a fiddle.

    I am surprised that George use the word “windfall” in his budget speech since the Guardian had reported several weeks before the budget “Treasury officials admitted that the £25bn – still to be valued properly – would reduce public sector debt on the government’s balance sheet, but they said it could not be considered a windfall because of ongoing liabilities to retired postal workers. “

    The budget report laid before the House by the Chancellor fairly conceded that the pension fund liabilities will be recorded in the new Whole of Government accounts. The report also stated that the non-gilt assets in the pension fund equalled about 1.5% of GDP.

    It follows that if the assets are realised, and the proceeds reinvested in funding housing association and local authority housing schemes, there will be a 1.5% boost to GDP (in a desirable sector) without increasing net government borrowing on a Whole government of government accounts basis.

    Since in his budget speech George was suggesting that private pension funds should do this kind of thing, it is not a great policy leap to follow his own advice in respect of the pension fund he has just taken over on behalf of the state.

    Over on Conservative home people have been suggesting that George should be replaced by Philip Hammond in the post-Olympic reshuffle. This may well be a good idea but if George moves swiftly on this he might deserve to retain his position, and certainly government spokesmen and women would have a little more to say when asked about what the government is doing to generate growth

  • Fergus Pickering

    Anyone hear Ed Balls at lunchtime on the Beeb. I always think he can’t get worse and he always proves me wrong. This is what 45% of the people want, is it?

  • Scotty

    The calls for growth remind me of the demands of a brown fingered gardener – just stand there and shout at the plants “grow ya bas grow” never mind the fertiliser, business friendly tax and regulations, never mind the seeds, good practical based education for all to create productive workforce and entrepreneurs, never mind the sun and rain, the state of the worlds economy – just grow ya bas – the balls strategy in summary.

  • zemplar

    What the IMF is saying is “The BoE needs to run its printing press like never before.”

    Central banks will print $15trn – minimum – by the end of the decade. As sure as night follows day.

  • TomTom

    Salopian, Merkel is Kohl’s chosen successor to preserve his legacy. She is a tactician but no visionary. “System Merkel” consists of surrounding herself with weak men and driving away competent ones. She is an apparatchik and NRW was an election with 40% abstention where Merkel’s party gained the lowest share of the vote in its history because her chosen candidate was a disaster and she fired him, Now her NRW Party is in revolt. She will be toppled.

    Germany cannot do anything more without a referendum for a new Constitution – the one imposed by the Allies in 1949 does not allow Merkel to do anything more. If she does Art 20(4) permits the Citizens to overthrow the Government to protect the Constitution –

    Germany has gone so far down the path of Self-Abnegation to meet French and Us demands inside Europe that it has reached the limits and can only move further by moving to a full EU Brussels Dictatorship and scrapping the Verfassung of 1949.

    Democracy is at a crossroads. If people want to give it up for an EU with full political and sovereign power it is time for the Referendum

  • Dimoto

    “When the IMF published a report into the UK economy last year, I wrote a blog post detailing how it managed to please everyone: George Osborne, Vince Cable, Mervyn King, Ed Balls, everyone”.

    PH – all true, but you’ve forgotten the most important LaGarde client – the French government/business.

    Even lower interest rates, more QE, tax cuts, more government spending – a nice, irresponsible, Brownite, public spending
    splurge, conveniently sucking in large dollops of French manufactures.

    Bet they’re grinning from ear to ear at Peugeot-Citroen !

    I don’t know why these ill-informed “guesses” from overseas, grab so much media attention.

    We should be looking at another disastrous set of deficit figures and demanding to know from Cameron/Osborne what the hell is going on !!!

    I’m joining the Fraser Nelsonists – this looks more and more like Osborne surreptitiously allowing public spending to rise to “stimulate the economy”.
    Lying through their teeth !

  • Salopian

    Dennis Churchill
    I agree. She’s had a bruising encounter in the NRW elections last week. But what’s her real agenda? She clearly does not want a stronger Euro since this would undermine their exports? But does she really care about the EU as a political peace guarding entity?

    Would t matter to Germany if thr EU fragmented and lost the Club-Med countries. They don’t buy much from Gernmny – annd even if they stat in the Euro they’re not going to have the dosh to buy German eports. I rather think that she’d be glad to be rid of Club-Med – but that would strenthen the Euro and we’re back where we’re back to the advantage of a low priced (EU?DM).

    The worry is that the DeutchVolk will see things differenlty next year.

  • Publius


    Yes. In the end we’ll all end up paying. Not just the prudent who are forced to bail out the feckless.

    As for inflation, so long as the masses can be duped into thinking that obvious price-rise kind of inflation isn’t happening, they’ll think all is well with this crazed scheme.

    But inflation does not only manifest itself in retail price rises – as any fule kno.

    But still the morons who write the financial pages say such things as ‘inflation is a problem for another day.’

  • KSW

    Publius, quite right, printing money is the oldest trick in the book, the Roman emperors used to do it. To say it is politically cynical is an understatement- the QE policy relies upon the fact that the majority of people are economically illiterate, and therefore don’t realise they are being fleeced to ensure the liquidity of the banks and support government borrowing.

    The people not mentioned in the IMF report are you and I, who are fleeced to pay for it one way or another.


  • Mark

    Its clear that for past few decades the rich have been getting richer and the poor poorer. Many economic solutions to recession and sovereign debt have failed to take into account the increasing level of poverty and the social impact of these economic policies. Many politicians (the ruling class)having become much better off than when they entered parliament and have become increasingly insensitive to the plight of the majority of citizery. Citizens in Europe have voted out current governments but will the people’s plight be changed by the newly voted authorities?

  • Dennis Churchill

    May 22nd, 2012 12:07pm
    Depends on how she reads the German electorate.

  • TomTom

    The IMF hasn’t a clue ! It is in real trouble. The OECD is forecasting a major downturn in EuroZone. There is no way we can continue to force-feed banks unlimited liquidity at 0.5% so they can strangle growth with 26% credit card rates. Default is the only way forward.

    The IMF has no idea how things got so bad and no idea how to resolve them. the strategy is called Extend & Pretend and the Crash will be enormous when it comes wiping out households and businesses. Noone will ever have seen the kind of collapse that is coming.

  • Publius

    Print, inflate, debase, deny.

    Gosh, ain’t it easy! Why didn’t someone think of it before?

  • Salopian

    What is really interesting about this report is its reinforcement Cameron/Osborne’s view that the recovery can only come through a combination of fiscal stimulus and “austerity”.

    Translate this into the EU situation and we see a signal to Merkel that she is chocking off fiscal stimulus to the weaker economies in the interest of protecting the German “soft currency” on which its industry clearly depends.

    But it also confirms her view that “austerity” is the other side of the recovery coin. But will she permit the EU to quantitately ease the EU Economy as a quid pro quo tuo buy Greek votes ?

  • Heartless (Romantic) Chillaxed Curmudgeon

    Prescription from People Who Should Know Better: Support Merv and his Funny Money.

    Like much else about this woe-begotten land, a total sham beats authenticity everyday!

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