Tag Archives: Mark Carney

There are none so blind as those who choose to be blind. A comment on contemporary journalism

This essay was prompted by an article in the left of centre daily newspaper that I read. In it the journalist (who is an economist) claimed that Brexit would be a non event similar to the millennium bug. It was an article I thought so typical of contemporary journalism, a well written article with a simple story line that ignored inconvenient realities. He dismissed those experts such as the Governor of the Bank of England, stating that they had constantly misread the economic runes and their predictions were always proved to be wrong, so why should we take their warnings of a bad Brexit deal seriously. Instead he preferred to trust the politicians, the realists who would deliver a good Brexit deal. In colossal misreading of history he said that the good guys, the politicians would deliver the best possible of Brexit deals. One can only believe he is ignorant of history, a history in which ill informed and incompetent political leaders led their country into disaster. 

There is one disturbing feature of this article which in so characteristic of contemporary journalism. That is the disparaging of experts and expert knowledge. What he is suggesting is those who know a something about their subject are to be distrusted and instead we should listen to the politicians who know little or nothing about the subject. He trashes the idea that there is something that can be called  human knowledge. As Mark Carney and the British Treasury have so often got things wrong, he claims that this proves that there is nobody who knows what is really going to happen in the economy, least of all the experts. Therefore it is just as well to trust the ‘know little’ and ‘know nothings’, as their sense of realism will prevail and they will deliver a good deal on Brexit.

Just as with so many who have studied economics, he can see no role for human folly in history. Unlike him I cannot consider the current generation of political leaders who have demonstrated serial incompetence in their roles, as the best people to be in charge when the country faces the existential threat that is Brexit. Can anybody really claim that any of our leading politicians have actually improved the performance of the departments in which they ran. The list of there failures is endless, transport, prisons, schools etc. This is why one minister has the unkind nickname of ‘failing Grayling’.In this government the good minister is the one that fails to made the department of which they are in charge worse.

However fairness demands that this journalist be judged as an economist. He bases his article on the claim that Mark Carney and the other expert economists got it wrong, when they said that Brexit would be bad for the economy. In his article he writes of several examples that demonstrate that the economy is sound and prospering, in spite of the referendum vote. Yet as an economist he should know that Mark Carney once the Brexit referendum was announced immediately pumped money into the economy to prevent the crash he warned against. This created cheap money and as interest rates were so low people borrowed to supplement their low incomes. Economic growth or what he terms prosperity has been founded on a rapid and unsound expansion of consumer borrowing. Such borrowing cannot continue for ever and the economy is rapidly coming to resemble that of 2008, when an over indebted economy crashed, with dire consequences for us all.

What this left wing journalist also fails to mention is inequality. The prosperity that he sees demonstrated in his local supermarket, excludes the millions on low pay. Those millions in the gig economy suffering the twin evils of low pay and insecure employment would have a very different view of the economy to his.

Possibility John Ford in his film ‘The Man Who Shot Liberty Valance’ had it correct, when his newspaper man confronted with an awkward truth, says it is better to print the myth than the truth. Similarly too many journalists prefer as does John Ford’s newspaperman to print the myth. In this case it is the myth of British exceptionalism.

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Brexit myth 2 – that despite all the evidence of the naysayers the economy is performing well

Government and its supporters in the media are constantly claiming that the economy will benefit from leaving the EU and constantly point to economic indicators that seem to demonstrate the correctness of their beliefs. They have the evidence of continued economic growth and the rise in the value of the FTSE 100 index (a measure of the value of the top 100 companies registered on the Stock Exchange). Their  constant trumpeting of good economic news suggests a certain nervousness, as people don’t need to be told that things are good, they know it for themselves. What they ignore is evidence that suggests the contrary, such as a slow down in the construction industry. Members of the building trade are asking for government financial help with the aim of increasing the number of housing starts, hardly an example of the success.  This is a story which will only be found in the quality press, it will be ignored in the popular press which as backers of Brexit detest any news that would suggest that Brexit is a mistake.

Any reader of the popular press will realise that the one measure of economic prosperity that they value is ever rising house prices. House owners can use their houses as a cash machine, using the ever rising value of their property to secure loans to finance the purchase of such as cars and foreign holidays. In doing this they can avoid the painful reality of living with stagnant or slowing rising incomes. They are living in what can only be called an economic fantasy land, as the speculative bubble that is ever rising property prices cannot continue for ever. There will be a crash which brings to an end this bubble and it is quite likely that Brexit will be the object that punctures this speculative bubble.

One journalist wrote that the falling pound will be good for the London property market as it will attract lots of well off foreign buyers into the market. However this ignores one fact, it is ever rising prices that attract foreign residents to invest in this market. Even today there was a report of a fall of 56% in the demand for luxury homes in London. This is a trend that can only increase as foreign residents seem London as a less safe home for their money. What they want is a market in which prices are constantly increasing as means the money they have invested in London will be constantly increasing. Any risk that the value of their investment in London properties means that they will shy away from the London market. A depression in the London housing market will fed outwards into the country as a whole depressing prices there.

Even right wing economic think tanks such as ‘The Adam Smith Institute” have expressed concerns about the impact Brexit on economic growth. Outside Westminster there are few economists that don’t think the long term effects of Brexit will be damaging for the economy. House prices will not continue to rise in a declining economy, they are more likely to fall. British home owners are increasingly unlikely to be able to use their homes as a cash machine.

The property market is inherently unstable and liable to experience shocks such as a rapid decline in prices. It is a market built on the belief that property prices will constantly rise is liable to panic once it is realised that prices are not going to go on increasing and rather than prices rising month by month, they will fall month by month. Not a welcome prospect for house owners, particularly if the falls are as spectacular as recent increases.

The British economy is driven by debt, whether it is money borrowed to invest in the property market  or money borrowed to finance the purchase of consumer goods. Private sector indebtedness is rising rapidly towards 200% of GDP (national income) and this is made possible by borrowing at what are historically low interest rates. It is no exaggeration to say that the British economy is afloat on a huge debt bubble. A lot of the borrowing that makes this bubble possible is done on very low interest rates. If interest rates rose many would find that they were unable to repay their loans, and debt defaulting on a large scale with a consequent popping of the debt bubble and a horrendous economic crash. Mark Carney the Governor of the Bank of England is aware of this problem and has for that reason pledged to keep interest rates at their current low level, even if inflation rises to 2.5%.

However Mark Carney’s hand could well be forced, there is a possible situation in which this could occur. Ever since Brexit the pound has continued to fall in the foreign exchange markets and at present apart from the prospect of rising inflation due to rising import prices, the falling pound has caused no other concerns. However the governor cannot forever ignore the fall in the value of the pound forever. The pound could fall to such low levels that it would pose a serious threat to living standards, as would happen if the pound fell much below the rate of £1 to $1. Even before that the governor could be forced to act if the fall in the value of the pound threatened to fall so fast that it threatened to make foreign trade impossible, this occurs when foreign buyers are unwilling to accept sterling in payment for goods because they fear that the pounds they received today will be worth substantially less tomorrow. Any central bank governor would be derelict in their duty if they allowed this to happen. The only means of reversing this downward movement is to increase interest rates, as if foreign residents thought they could earn more on their deposits of money in London than elsewhere, money would flood into London, so pushing up the foreign exchange value of the pound. Unfortunately other financial centres would be forced to follow suit and rather than there being a modest increase it could be quite substantial.

This would present Europe with a substantial problem, as the countries of Europe also have substantial private sector debts. These debts can only be sustained if interest rates remain low which will not happen if the above scenario occurs. In the very worse of events, Brexit could cause a European wide crash. Hopefully it will not happen, but if I was a European central banker I would be suffering many sleepless nights.

The cause of what could be a horrendous economic crisis is a group of poorly educated politicians making decisions about an economy of whose workings they appear be in ignorance of. Michael Gove a prominent leave campaigner stated during the campaign that people were fed up of experts and wanted to hear nothing more from them. If political leaders such as him had listened to the experts (economists) the government would not be in its current mess. All the political leaders of the leave movement can do is to abuse their opponents who correctly point out that the emperor has no clothes and try to close down the debate on Brexit for fear that it will expose their own inadequacies.  If I said the new minister for external trade was the minister for trade with cloud cuckoo land, it would not be unfair as the ministers seem to have little idea of what is required to negotiate trade agreements with real countries and not those of their imagination.

Why economists are so miserable and why you should never trust a happy economist

I can explain the title through referring to a story from the Westminster political scene, as it demonstrates how politicians fail to understand the role of the economist. Although Mark Carney as  governor of ‘The Bank England’ and is not strictly speaking an economist, only a person thoroughly grounded in economic theory and practice could fulfil this role. He was called to a meeting of the Select Committee on the Treasury to explain why he gave such a negative account of the impact of  Brexit. Why the assembled politicians wanted to know did he give such a negative account of its impact on the economy, as all knew that in fact the economy was as buoyant after the vote to leave the EU as before it. He answered that he remained serene about his prediction of a dire economic future if Brexit occurred.

There are two answers to the question posed by the angry politicians.The first is that he by being aware of the possible bad effects of Brexit, had reacted immediately after the vote to offset the negative impact through cutting interest rates and pumping more money into the economy by the process of quantitive easing. These measures restored business confidence and enabled the economy to recover from the immediate post Brexit blues. However this was a short term measure, which had a short term effect. The truth or otherwise of his predictions will be known in 2017 when negotiations to leave the EU begin in earnest. The uncertainty engendered by the negotiations to leave the EU will have a negative impact on business confidence and investment. Businesses will postpone investment decisions or as with the major car manufacturers look to develop their new models in those parts of Europe that are unlikely to be subject to the import tariffs that British exporters will have to pay. There seems to be a consensus among economists that incomes will fall in the long term by 4% or more as a consequence of Brexit, which if these angry politicians had listened to Mark Carney’s speech would have realised that this is what he was saying.

However what these politicians fail to demonstrate is a fundamental misunderstanding of the role of economists. Economics is with some justification known as the miserable or the gloomy science. The role of economists is to look for the worst in possible outcomes that could develop as a consequence of current policy decisions or current changes in the economy and to warn against them. Foreknowledge of the bad to come enables politicians to take action to prevent the worst of all possible futures from happening. Happy economists fail in this task as they never foresee future economic storms and squalls. The Governor of ‘The Bank of England’ at present with his advisors is considering what possible future measures he will need to enact in 2017 to prevent the worst effects of a loss of the uncertainty generated by the Brexit negotiations. If like the many politicians advocating Brexit he took an optimistic view of the future, he would lie woefully unprepared for the expected downturn in the economy in 2017. What politicians fail to understand is that economists and Bank of England governors are doing the job for which they are paid when they a being economic miserablists or Jeremiahs.

When economists are happy they are not fulfilling their role. Before the crash of 2008 the vast majority of economists were upbeat about the economy. They believed that the world economy had entered a new paradigm in which the old caveats about credit bubbles and an overheated economy no longer applied. The over whelming majority of economists believed that the world economy had entered a new phase in which it would continue on an ever upward trajectory, in which the minor mishaps that occurred could be remedied by a few simple changes in monetary policy, such as varying the interest rate. Those few economists that warned that the world economy was heading for a financial disaster were ignored. After all who is interested in the pessimistic views of a miserable neighbour. Politicians just like the rest of the population are not interested in unpalatable truths, they just wanted the party to continue.

When the Queen asked the economists why they had failed to predict the crash of 2008, she was asking the wrong question. What she should have asked is why they had abandoned their role of that of social Jeremiah for that of cheer leader. Politicians could deny their responsibility for their irresponsible policies that led to the crash of 2008, by claiming that economists also believed that that they were pursuing the right policy. The financial crash could be claimed to be a once in a life time unforeseeable event, such as the Tsunami and therefore politicians should share no blame for the crisis which in reality was a large part of their making.

Economists can be compared to the Old Testament prophets who warned the Israelites of the dire consequences of ignoring God’s will. Similarly economists should be warning of the dire consequences that will follow from ignoring economic realities. Although revering their prophets the Israelites could react badly when their were told things that they would rather not know. Isaiah is reputed  to have been sawn in two while hiding in a tree, after having angered King Manasseh. The Israelites had time for regret after the disasters following on from the invasions by the Assyrians. Economists will always be tempted to follow the party line or say what pleases those in power and the consequence is a disaster such as that of 2008, when economists should as one have been urging the government to take action to end the dangerous explosion of credit, they were encouraging the government to continue to inflate the asset bubble. A good economist is one that is willing to court unpopularity, as did the Old Testament prophets who sought no one’s favour when speaking God’s truth.

I as am economist am very wary of speaking the truth about future events to my friends, as to do so is one way of losing ones friends.