Tag Archives: Black Wednesday

What is required today is a return to the economics practised in 1968

The storm clouds are gathering over the economy, yet our political leaders seem oblivious to the approaching storm. These are some of the gathering clouds, inward investment has fallen 80% since 2016, the investment in national infra structure is at levels similar to Greece and in consequence economic growth fell to 0.1% in the last quarter. As a nation our trade deficit is the highest, as a proportion of GDP in the developed world. A trade deficit of 5.9% of GDP is only reduced to 2.2% through the contribution of financial services. A situation in which the U.K. is over dependent on recycling foreign cash invested in the U.K. to pay for imports. This gives an incentive to government to ensure that the City of London remains the largest money laundering financial centre in the world. Dirty money is as acceptable as clean money for paying our debts. This situation cannot continue indefinitely, if politicians cannot take action to resolve some of these problems, they will resolve themselves. This resolution will come in the form of an economic crash which will make us all much poorer.

A useful comparison can be made with the 1960s and 1970s a period of frequent balance of payment crises. In the 1960s the trade deficit never exceeded 0.6% of GDP and in the crisis year of 1976 it rose to 1% of GDP. These deficits always called for remedial action such as devaluation and economic policy measures to reduce the demand for imports. Now this ever rising import bill is never considered a problem for the U.K. Its role as one of the world’s financial centres ensures that it always has ample reserves of foreign currency to finance its debts. What never troubles the world’s governments is that one of the world’s largest financial centres lacks the strong economy to sustain it in that role. In the 19th century Britain’s strong economy enabled it to fulfil its role as the world’s banker. Now with a significantly diminished role in the world’s economy it still tries to be the world’s banker. This mismatch cannot continue, we as a country are unfortunately heading for a crash that could wreak havoc with the world’s financial system. The catalyst could well be Brexit when Britain begins to lose its role as the EU’s banker and uncertainty develops about the UK’s future this could precipitate a flight from sterling similar to that which happened on Black Wednesday. This time there will be no easy strategy for quickly resolving the situation. There is no ERM to leave and no easy currency devaluation to make. The pound will crash and the only remedy will be a large IMF loan and the imposition of a Greek like austerity programme.

Whatever criticisms the politicians of the 60s and 70s deserved, they were at least pragmatists. Unlike today’s ideologues they can recognise that there was a reality that existed beyond the world as seen from Westminster. The Labour government of 1976 could embark on an incomes policy that would alienate its supporters, knowing that this was necessary to restore the economy to health. This programme of income cuts was the only way that the government could reduce the high level of inflation and reduce the trade deficit. This programme was so successful that by 1979 the trade deficit had been converted into a surplus. These politicians were pragmatists who listened to the advice of outsiders and adopted an economic programme that was contrary to their political instincts.

Unfortunately this government of pragmatists lost the election to a party led by radical minded ideologues. They advocated a policy of Neo-Liberalism, which included as part of its policy manifesto the recommendation to adopt supply side economics. This meant freeing up resources from the less productive parts of the economy by closing them down. Capital and labour would them be freed from being shackled to old inefficient industries and be freed to be used by the new dynamic industries that would replace them. This it was they claimed would boost economic growth. What was talked about was the so called ‘weightless economy’ an economy largely devoid of manufacturing industry instead one based on the finance and industries such as the entertainment industry. These new industries would replace the jobs lost caused by the closure of the old manufacturing industries. The economy never developed in a way that these new economic prophets claimed.

At the beginning of their period in government these Neo-Liberals were warned by economists that there policies would lead to depression and the damage British manufacturing industry. Yet they were ignored by the new radicals, who knew this was outmoded thinking. The British manufacturing sector lost 20% of its capacity, with the consequent widening of the trade deficit. A deficit temporarily covered up by the wealth generated from the exploitation of North Sea oil. The old manufacturing centres declined, there was no rush of new money to so called new industries to compensate for the lost output from the old manufacturing industry.

What was damaging to the country’s economic prospects was new understanding in politics that the economy no longer mattered. Free marketers in government believed that economy was a largely self regulating mechanism that could be largely left to itself. All that was required was the occasional light touch on the tiller in the form of interest rate changes. What was once a major department in government, that of Trade and Industry now became a mere sideshow. Now industry could be left to run itself, no longer would government try to pick winners.

What these politicians had forgotten was the words of Maynard Keynes, there would be times when the government would be needed to save capitalism from itself. That happened in 2008/9 when the world financial system was only saved from the consequences of the financial crash by timely action of governments. Politicians learnt little from this crisis and continued the policy of non intervention. When I was a child one popular ornament was the China or brass three monkeys who epitomised the motto ‘hear no evil, see no evil, speak no evil’. This is the government’s current approach to all matters economic. No matter what wrong doing is practised by managers and directors, as in the example of Carillon, they do nothing. Even if individuals can do wrong, the belief is that the market as a whole can do no wrong.

In the now much discredited 60s and 70s there was a belief amongst politicians that the welfare of the nation was dependent on the well being of the economy. Whatever the political conviction of the politicians, they believed an interventionist economic policy was necessary to maintain the well being of the economy. When the economy was in danger of over heating it for example imposed restrictions on demand to prevent that happening. Perhaps the most famous is Selwyn Lloyd’s 1961 credit squeeze. Unlike today’s politicians they did not see inflation in the housing market as a good thing. This contrasts markedly with all governments of the past twenty years who regarded house price inflation as a good.

One consequence of this is the unfortunate lending programme of the banks. Today only about 6% of bank lending goes to manufacturing industry. In 2008 almost 80% of bank lending went to the property market, a figure which it is approaching today. The U.K. remains an economy in which the main driver of economic growth remains property speculation, while manufacturing industry the real creator of the wealth that matters is neglected.

Whatever experts might say or write contemporary politicians remain impervious to economic realities. Nothing of what I have written impinges on their consciousness. They now seem to inhabit a hermetically sealed world into which no outside thought intrudes. The leadership of the main parties are locked into an increasingly complex debate in which each of them strives to deliver the most authentic Brexit. That the Brexit promised by each of the leaderships is a fantasy, that fails to acknowledge any economic reality is of no concern to these politicians. In the words of one leading Brexiteer, the people are tired of experts and don’t what to hear what economists such as myself say. All that matters is the authentic voice of the people as interpreted by the Brexit politicians no matter how fantastic that interpretation.

Advertisements

Fools Gold or the Economic Follies of Phillip Hammond and like minded Conservative Politicians.

Our current Chancellor is nicknamed spreadsheet Phil, a name intended to reflect his prowess in managing the country’s finances. His proud claim was to have achieved what most Chancellors had failed to achieve, that is a balancing of the books. He announced that the government daily revenues exceeded its spending. To use economic jargonese current revenue exceeded spending, that is tax revenues exceeded spending on hospitals etc. This was for him a cause for celebration and he was feted in the financial columns in the print media. However much like iron pyrites* all that blisters is not gold.

Chancellors of a Conservative mind have always sought to achieve the holy grail of sound money. A non existent myth much like that of the holy grail. As students we were given the example of Winston Churchill who as Chancellor who returned the pound sterling to the gold standard in 1925. He choose a rate that valued the pound at $4.84, its pre war value. He said that he wanted to look the dollar in the eye. A political move as the ravages of the First World War had diminished the relative value of the U.K. economy and its currency and had confirmed the USA as the world’s leading economy. Consequently the dollar was now the world’s strongest currency. Churchill wanted to put the pound on a par with the dollar. It was economic folly, as the expensive pound priced U.K. exports out of foreign markets. In consequence the U.K. had a trade deficit, which could only be kept within reasonable bounds by depressing the level of income activity. This cut the level of overall demand in the economy and so reduced the import bill. Much of the misery experienced by the people of the 1920s was a consequence of this policy.

Phillip Hammond just as did his predecessor, does not understand that a weak or unsound economy makes any sound money policy fallacious. Simply because such a weak economy is likely to experience sudden and unexpected downturns, which in the eyes of the financial community can render the sound pound and chancellors reputation unsound over night.

Our current Chancellor has continued with the austerity policies of his predecessor and has fulfilled his predecessors aim of ensuing that government revenues exceed its spending. What they both want is the respect of the financial community. If the financial community believe that the government is pursuing a policy of sound money, they both believe many benefits accrue. One is that this community will allow them to borrow at low rates of interest. However this is of little practical benefit when the government chooses not to invest. Currently investment in infra structure projects is the same as in Greece one of the most impoverished of all EU member states.

However the plaudits of the financial community soon become worthless in a financial crisis, as then that community is forced to confront stark economic realities, that they would prefer to ignore. At present the current benign economic climate allows the financial community to overlook the very obvious weakness in the economy. When forced to confront them they will turn on the government. Greece provides the obvious example of what happens in these circumstances.

Phillip Hammond is astute enough to realise that the U.K. is subject to regular periodic economic crisis.* When that occurs he might need to find the funds to tide the U.K. economy over that crisis. He believes that if he builds up a war chest of money by continually spending less than he receives, that money can be used to avert any run in the pound as occurred on Black Wednesday. What the Chancellor fails to understand is that this cash reserve will rapidly diminish in value as the pound falls in value during a crisis so in consequence making that reserve of cash too small to be of any real value. One of the characters says in a Stendhal novel, that what takes ten years to build can be destroyed in ten minutes of warfare. The same applies to Chancellor reputations. In any major financial crisis the government and the Chancellor rapidly lose all credibility, so all the years spent creating a reputation for soundness are rendered meaningless.

What should be the aim of any Chancellor is a sound economy not a sound money policy. While there are many fundamental weaknesses in the U.K., two stand out. The first is the persistent trade deficits. At 6% of GDP it is the highest of any developed country. This debt is financed in part from money invested in the U.K. by foreigners. As a country we are paying Germany, the USA and our many other creditors by recycling the money that there nationals invest in this country. A situation that cannot continue indefinitely. One day the financial community will decide that the emperor has no clothes.

Secondly as a nation the U.K. borrows short and lends long. The U.K. is one of the world’s leading financial centres and as a consequence many foreign nationals invest there savings in London. These moneys are usually invested in accounts with a short term notice of withdrawal and pay a relatively modest interest rate. British banks to finance these accounts lend long for which they receive a relatively high rate of interest. This arrangement works fine when the investors have confidence in the country concerned. In the event of a crisis these investors want their money back. If the amount invested is relatively small compared to the size of the country’s wealth (GDP), that country will have no problem in averting a temporary ‘country run’. When those sums are relatively large when compared to a nations GDP as in the case of the U.K., the county’s reserves of foreign currency will be too small to avert a ‘country run’. As Black Wednesday demonstrated when the country was bankrupted in one afternoon due to the activities of foreign currency speculators. Unfortunately spreadsheet Phil appears to be ignorant of this fact.

Britain’s chancellors should have been working to remedy all the flaws the financial crisis of 1992 and 2008/9 revealed. Instead there has been a papering over the cracks, with the so called sound money policy. This is not a folly practiced not by just Conservative Chancellors of the Exchequer. When Gordon Brown was Chancellor in a Labour government he also pursued a sound money policy, instead of implementing the necessary structural reforms necessary for strengthening a weak economy. Although the crisis of 2008/9 was a financial one caused by the foolish speculative activity of financial speculators, the fact that he and none of his successors failed to make any attempt to create a sound economy, meant that the economy has failed to make the expected recovery from the last crisis. The majority of the population have experienced either falling, stable or small increases in income since 2009, a mark of a failing economy.

It is a perverse rule of thumb that when the financial columnists particularly of the right wing media laud a Chancellor for the soundness of his economic policy making, usually that Chancellor is making a hash of things.

* Iron pyrites or fools gold were the staple of many stories in the cowboy magazines of the 1950s.

* He is aware that just such a crisis might occur when the negative consequences of Brexit become obvious to all.

Is there a possibility that events such a Black Wednesday will occur more frequently in the future?

The short answer to my question is yes. There will always be that occasion when that combination of human folly and arrogance will lead to a repetition to the economic disasters of the past. As an economist I can reconcile myself with the knowledge that such crisis are but a once or twice life in a time occurrence. Unfortunately I believe that I will be unlucky enough to experience a third life time economic crisis, but one of such damaging dimensions that it has the potential to make the crisis of 1992 and 2008 seem relatively insignificant.

Recently I read an article in ‘The London Review of Books’ which expressed an opinion which I share and that is, that for the first time in recent history we have a group of leading politicians who want to do ill to a substantial number of their fellow citizens. These politicians are the ultras of the Conservative party. It is not just the turning back of the clock to disadvantage those groups that have profited from modernity, but desire to impoverish large numbers of their fellow citizens. Now some of them are beginning to openly admit that leaving the EU will not deliver any of the benefits they claimed in the referendum campaign. In fact they recognise that there will be a significant loss of national income as a result of Brexit.

There are those who believe that the economic downturn consequent on ending our free trade deal with the EU, will lead to a modest reduction in living standards.  They believe that the stoicism of the British will enable them to weather this temporary storm. Britons endured worse during the Blitz and so they believe they will the people demonstrate a similar stoicism in seeing out this downturn. Just as in 1940 they will see this deprivation as a price worth paying  to be free of this new tyrannical continental behemoth that is the European Union. They seem to want to replay the 1940s, but with a contemporary twist.

However what they do not seem to realise is that the various predictions of a 3% or 8% in future income growth are the cautious predictions made by economic statisticians. The  economy is not some mechanical creation such as a car that can be tinkered with to produce a slightly more modest performance, it’s a dynamic social organisation that is capable of volatile, unexpected and sudden changes in direction. An economic slowdown is quite capable of turning into something much worse.

The British economy as with many others includes within it many economic fault lines that if triggered would wreak tremendous damage to the economy. What these foolish politicians have forgotten is “Black Wednesday’ in 1992, a day in which speculators effectively bankrupted the country.  All the weakness in the economy that existed then, still remain today. One such is the massive private sector indebtedness, which includes that of the banks. Britain is one of the world’s bankers and as such it holds a large proportion of the world’s cash reserves. The banks assets are moving towards a position whereby they total nine times the county’s GDP, that is about £18 trillion. Just as in 1992 the British banks are borrowing short and lending long. In plain English customers deposit money on short term notice, money that they can withdraw on demand or with a few days notice. Banks lend this money long term, it is invested in property or some other asset, which either cannot be quickly changed back into cash if needed or if cashed in it will return a value much less than that for which it was purchased. British banks have reserves that they can use to fund cash withdrawals in normal circumstances, so this is never usually a problem. However it becomes a problem when the abnormal happens and investors lose faith in the banks and want their money back. The abnormal occurred in 1992 and 2008. On the first occasion the central Bank was almost bankrupted and in the second if was the entire banking system that suffered the same experience. Nobody that is not a fool or an arrogant politician with little understanding of economics would do anything to provoke a recurrence of these past crisis.

One of the triggers of a depression is falling business confidence, once that is lost the economy is in the doldrums. The maladroit government negotiations with Europe over Brexit is leading to a loss of business confidence, as businessmen are increasing uncertain of what the future holds for them.  Whenever politicians are informed on problems tor business that are developing because of Brexit, they are either ignored or dismissed. Such behaviour is further draining confidence out of the economy. In such febrile circumstances a run on the pound could easily be triggered. One such trigger point occur at the port of Dover. The government has made no preparations for the reintroduction of customs barriers at Dover, yet free trade with Europe will end in the near future forcing the government to reintroduce customs barriers. New staff are not being recruited and it no preparations have been made to introduce new  IT systems to processing the import and export trade tariffs, such checks are unnecessary while Britain remains in the single market. It seems to assume that they can introduce a seamless system of tariff collection, when they or nobody else in the world knows what such a system will look like or even if such a system is possible. After March 2019, when Britain leaves the EU and chaos prevails at Dover and other ports, it will be a demonstration of government incompetence. When the government is demonstrating such a degree of incompetence investors could take fright and take their money out of British banks. Our banks are quite incapable of funding such a large and sustained flight from sterling and the UK would have to turn to the IMF for help. The resultant crash would turn the British economy into an economic basket case resembling that which is contemporary Greece.

However there are a minority of Tory Ultras who would welcome such a collapse. The consequence shortfall in government finances would mean that many of the institutions of modernity, such as the welfare state and the NHS could cease to exist through lack of funding. They like the medieval doctors who let blood to purge the body of noxious vapours, believe that an economic crash which destroyed the welfare state would lead to a similar purging of the British character.  Such a purging would be the purging of the welfare dependency virus, no longer would the British people be able to look to the same for welfare or health care. This purging of the British character would lead to a rejuvenation of the British, they would become like their independent 18th and 19th century forebears who created the largest empire the world has seen. Some ultras are even speaking of the Empire 2.0.

However they show little awareness of history, the Greek political parties that dominated the Greek political scene prior to the crash of 2008 that is New Democracy and Pasok have disappeared from the political scene, as the people blamed them for the decimation of their incomes and economy. Although these Tory ultras are careful to remain in the background pulling the strings to ensure that the government commits to their desired hard Brexit, they would not be unable to avoid ‘ownership’ of the post Brexit economic crisis. They were members of the party of government that caused the economic crash and in any election many would be voted out by an angry electorate.

Greek tragedy provides a metaphor which can demonstrate the reality of the crisis facing Britain. In Greek tragedy the God’s raise the hero up, only to later destroy him. It is as if the God’s of the economy have raised the Brexiteers and Conservative Party Ultras to power only to destroy them. The Gods seem to have chosen the least capable and those least fitted for the role to lead the Brexit negotiation, knowing that their incompetence will be the cause of their downfall. It is tempting to refer to Winston Churchill wartime speeches in this context, because they see themselves in the Churchillian role of standing up to the continental tyrant. He said the Nazi’s would reap what they had sown, the same applies to the Brexiteers who will reap the consequences on what they have sown. Not the whirlwind of mass destruction but the whirlwind of economic destruction. Quite possibly the Conservative party, as with the conservative Greek New Democracy party will disappear from history.

Any prediction made by an economist is never more than a probability or a possibility. When the Bank of England predicted economic meltdown if Brexit occurred, it was widely assumed that they had made a terrible mistake, when this never happened. However this scenario was avoided through the prompt action of the governor of the Bank of England, who fearing a downturn in the economy, pumped billions of pounds of extra money into the economy to prevent that downturn happening. Similarly it is possible that the realists in the Conservative party regain control and instead of going for a decisive break from the EU with all it’s damaging consequences, they will negotiate a ‘soft Brexit’ which will minimise the damage to the British economy which will result from leaving the EU.

Economics of the precipice

There seems to be a lemming like instinct among politicians, in that if the economy is in trouble they seem to do exactly the thing that is designed to push it off the economic cliff. A behaviour that mirrors that of the lemmings who are popularly supposed to commit mass suicide by jumping off a cliff into the sea.The current situation in the United Kingdom (UK) provides a good example of this lemming instinct within the political classes.

The economic auguries are not good for the UK. One obvious problem is the record trade deficit, the highest for any country in the developed world. Then there are the record levels of consumer debt again some of the highest in the developed world. Finally there is the combined deficits of the banking sector which are in excess of 400% of GDP.  There are also a host of other problems such as some of the lowest levels of productivity in Europe and the continuing decline of the manufacturing sector make for a troubled economy. The decline in the manufacturing skills base is is so marked that the Ministry of Defence can no longer find within the British economy sufficient native engineers to design and build our warships. In desperation the Ministry of Defence had to borrow warship designers and engineers from the USA for this task. In such a situation what is least needed is a political shock that could send the UK economy into a dangerous downward spiral. Yet our political classes did just that with Brexit.

One of the leading campaigners even said that the warnings of economists should be ignored as there could always be found self interested experts to support any political campaign. Ignoring the facts is the criteria of all lemming politicians.

To be fair the vote leave politicians they did recognise that there might be an economic downturn, in the event of a vote to leave the EU. However they assumed that it would be a small and temporary economic downturn one from which the economy would bounce back. History shows that when politicians plan what they think will be a temporary economic downturn, it proves to be anything but, as these downturns can easily spiral out of control.

The greatest threat to the UK prosperity is its massive private sector indebtedness. The level of debt is so great that it vies with Japan for the unwanted title most indebted of developed nations. Unfortunately it is in a much weaker position than Japan in that much of that debt is debt owned by foreigners. This foreign owned debt consists largely of money lent at short notice (that is the debt that the owners can demand repayment of immediately or within a very short time period), which is then lent long to property companies etc. Meaning that in the event of a large withdrawal of funds the banks will have trouble meeting the demand for cash. Only if the banks and the Bank of England have sufficient reserves of foreign currency can they meet the demand.

This is a very volatile situation as demonstrated by the fact that soon after the Brexit decision, many property funds had to stop customers withdrawing funds as they did not have sufficient funds to meet the demand for cash. This proved to be only a temporary crisis as the Brexit panic was short lived and the funds could return to normal operating practices, when the panic ended. However what is forgotten is that on Black Wednesday  speculators forced the Bank of England a state of near bankruptcy, when it ran out of foreign currency reserves to meet the demand for foreign currency. Whatever might happen in the future, the UK remains as vulnerable as it was in 1992 to an adverse movement in the foreign exchange markets. Only the most foolish of politicians would want to create a scenario in which that becomes more likely.

What every politician should know is that to deliberately provoke an economic crisis or downturn no matter how small to achieve some political end, is the most foolish of all actions as such downturns always prove hard to control. All too often a small economic crisis turns into a major crisis that has difficult and unforeseen consequences. Politicians need to learn that they cannot turn the economy on and off as they please.

Fairy dust the magic ingredient that makes for successful policy making

 Edit   

  

fairy dust – Fairies Photo (17694885) – Fanpohttp://www.fanpop.com


Economics is a subject that is never related to the childhood world of fairy tales, yet Tinkerbell* and her magic dust is a useful concept to use in economic analysis. I can illustrate this with reference to the financial crisis of 2008/9. Everybody knows that the government borrowed the billions of pounds to bail out the banks, but very few understand how the government borrowed that money. It was in the borrowing process that drops of magic fairy dust were applied, it might seem strange to apply such childish concepts to economic policy making, but they are apt.

When the government borrows money it does it by issuing government bonds, which are then bought by members of the financial market. Those members of the financial markets which buy these bonds are the banks and those banks included the those that are receiving the bail out funds from the government. It may seem surprising that banks such as the Royal Bank of Scotland and Lloyds which were literally bankrupt could buy these bonds, however virtual bankruptcy is not quite the same as actual bankruptcy, so there was no bar on them buying bonds to raise the money, which would then be given back to them as part of the bail out loan. This is where the magic comes in, when a bank uses its bad money to buy government bonds, what it gets back in return is good money. It as if the government had sprinkled fairy dust on to the bad money to transform it into good money, much as Cinderella’s fairy grandmother turned the pumpkin into the coach.
Just as Tinkerbell only comes back to life when all the adults in the audience shout out that they believe in fairies, the government’s magic only works as long as the people  believe in it. This financial sleight of hand only works as long as the public believe.  In countries such as Greece where this belief has long since disappeared this type of conjuring trick would be impossible.
What is little realised is how important ‘fairy dust’ is in economic policy making. A good example is the bank rate. Bank rate is the rate of interest which the Bank of England charges on loans that it makes to other banks. It is the rate at on which all banks base their interest rates, their rates are the Bank of England rate plus a percentage add on. This way of calculation interest rates seems very sensible as it is common sense to add a mark up to a loan to cover the cost of borrowing money in case of trouble from the central bank. However most financial institutions are ineligible to get loans from the Bank of England, so it’s a convention or a fiction, but one which is widely believed. The belief in this fiction is so strong that the monthly setting of the bank interest rate once a month is believed to be the key determinant of the level of economic activity. If the rate goes up it is believed that this will effectively slow down the level of economic activity and prevent the economy overheating. As if this one key rate goes up all other interest rates go up so borrowing becomes more expensive, so individuals borrow less and demand falls and so in consequence does inflation.
However some doubt must be cast on this policy as Bank rate has been at near zero for the past five years and economic level has been at its lowest level for decades. Yet cheap money should mean demand rises, as money is cheap to borrow and the economy should be experiencing record rates of growth. Obviously something is missing and that missing item is economic fairy dust, businesses and people have stopped believing in the magic practised by the economic policy makers.
Perhaps the best illustration of this is Black Wednesday in 1992, when the Chancellor of the Exchequer North Lamont increased the central bank interest rate from 10% to 12% and then to 15% in an attempt to stop the speculators from selling the pound. These speculators by selling the pound were trying to force the pound down in value to make a profit. He lacked credibility as there was no ‘fairy dust’ making his policy credible. All he achieved was to nearly bankrupt the UK. By the end of the day he admitted defeat and said that the pound sterling would leave the European currency union and no longer be fixed in value in relation to the German Deutsch mark. The pound fell like a stone in the money markets and the speculators were able to buy cheaper pounds in exchange for the dearer pounds they had sold earlier. (The government had guaranteed the value of the pound sterling in terms of Deutsch marks, so all the speculators had to do was sell their holdings of billions of pound sterling at the rate guaranteed by the government, forcing it dispose of most of its holdings of foreign currency to pay the speculators. If the trade in pounds had gone on for much longer the countries foreign currency reserves would have been exhausted and it would have been bankrupted.) The point I am trying to make is that is not the policy that matters but the belief in the efficacy of the policy and the policy makers. If the market does not believe that the policy makers possess economic ‘fairy dust’, the policy will not work. 
Giving a more contemporary example Britain’s economic growth rate is well below its trend rate only averaging 0.7% a year. If Britain’s manufacturers really believed that the Chancellor possessed that economic magic miracle maker fairy dust the economy would be booming. Last week 100 top industrialists wrote a letter to The Daily Telegraph, stating how important it was that policies of the coalition government were continued because it was the road to economic recovery. Yet there very actions demonstrate the reverse, investment in British industry is at a record low as is productivity, by any rational measure of economic success the UK economy is still failing. Business leaders whistling in the dark will change nothing.
Our political leaders lack the skills that successful politicians need, that is the ability to make people believe in them. The mockery with which our politicians are subjected to in the media is not a product an age that  believes in nothing but the product of any leading politician to give the people anything to believe it. They offer various varieties of the same story to a sceptical public who sees it not working, yet politicuans believe that by endlessly repeating the same formulas people will believe and things will improve. In desperation the British people are turning to political mavericks such as Nigel Farage in the belief that they possess the magic. Unfortunately success only comes from good policy plus magic not magic alone.