I also seemed to be waking up slightly earlier than usual and waiting, slightly paranoid, for the wristband’s alarm function to start vibrating, my drowsy brain trying to work out what kind of movements would persuade it that it was time to rouse me.

I’m pretty sure these aren’t the kinds of habits the Up is supposed to inspire. Indeed, as part of the new and growing fad of wearable tech, the Up’s tagline is “Know yourself, Live Better”: the objective is to nudge you into living healthier, sleeping better.

Essentially (and I’m sure the people at Jawbone, who kindly sent me one to look at, don’t put it quite like this), the Up is a glorified pedometer. You wear it on your wrist; it measures the number of paces you take; when you sleep it measures how much you’re moving around; and in the morning it wakes you up during a pre-determined timeslot, detecting from your movements when you’re in light, rather than deep, sleep.

Every now and then you plug the thing into the earphone socket of your smartphone and it syncs up with it, telling you how much you’re sleeping and how many paces you’re taking. Apparently since I started using it three weeks ago I’ve covered 127km and slept 123 hours.

What I’m not quite sure of yet is what to do with that information. I don’t think I’m taking any more exercise than I was beforehand, nor am I sleeping any longer. From my perspective the main advantage of the Up is having an alarm clock that wakes me without making too much noise. The problem is that occasionally it seems to misfire, vibrating at random moments rather than when I expect it to go off – which I guess is why I’ve been waking up early, wondering whether it’s about to go off, or whether it’s having another mercurial day.

Having said all of that, I am still wearing the Up today, and see little harm in wearing it in the future. The problem is that it doesn’t really do as much as I’d like it to do. For instance, I’d rather like to have a wearable device with GPS so I can take it on runs and get genuine tracking of pace/distance etc without having to carry my phone with me. I’d like something which measures heart rate and temperature, both body and environmental. Happily I think those kinds of sensors aren’t all that far away. The Basis, for instance, is a watch with a heart rate monitor and all kinds of sensors that measure stuff like that.

As John Lanchester writes in the latest London Review of Books, the apotheosis of this is the Google Glass, a pair of glasses with a camera, primitive computer and display built in. One of his key concerns is the fact that you can record videos of people without them. I’m less worried about this (I’m sure if society has a problem with this then pretty soon governments or regulators will shame Google into installing a light that makes it pretty obvious you’re recording anything), and more interested in the potential for exercise.

For instance, I’d rather like to have a heads-up display showing me how far I’ve run. If I could hook the Glass up to an external camera it could make for an excellent rear-view mirror when I’m cycling (I currently use a Reevu helmet for this but it’s inexplicably been discontinued).

The problem, and there’s no getting away from this, is that by any standards you look like an awful geek when wearing Google Glass. Just, really, really sad. I’m sure in the fullness of time we’ll become inured to them, but then they probably said that about Bluetooth headsets too.

The post The Jawbone Up and me appeared first on The Real Economy.

It’s now at 2.37 million, compared with 2.57m in February. The unemployment rate is down from 8% to 7.4%.

You might have realised by now that these figures bear little relation to the numbers being reported elsewhere this morning, which show the unemployment rate at 7.8% and the number up by 15,000 to 2.52 million.

This is because those figures – the ones the ONS quotes and everyone else follows suit – are an average over three months rather than one month on its own. That’s fine and makes plenty of sense. However it’s telling a story that’s effectively out of date: yes, if you compare unemployment in the final quarter of 2012 with unemployment in the first quarter of 2013 (as the ONS is doing) then it’s a touch higher. But that’s to ignore the fact that in the most recent month the labour market has been improving, not deteriorating.

If you compare the (three month period Jan-Mar) figure the ONS quotes in its release today – 2.52 million – to the the three-month period it cited in last month’s release, Dec-Feb, it is also lower – by around 45,000. Come to mention it, it’s only a few thousand above where it was in Nov-Jan. In other words there is no doubt that the direction of travel this latest month, compared with last month, is down. Why the ONS has to confuse us by giving the impression that unemployment is on the rise is beyond me.

There we are. Hope that’s clear. Rant over.

The post A quick rant about the unemployment figures appeared first on The Real Economy.

He joked with a Slovenian journalist to “come and join the Sterling area!” He threw in one or two football jokes. He even had time to lob some acid criticism the way of some of his bugbears – the Financial Transactions Tax, the International Monetary Fund and Alistair Darling, to take just three.

And he can, to some extent at least, afford to leave office with a smile on his face. The economy is recovering. The Bank was able to raise its growth forecasts (not to mention its “backcasts” of recent history), projecting that the economy will grow by 0.5% in this quarter. It cut its inflation projections, which lessens the need for more quantitative easing any time soon.

These are two things that, Sir Mervyn pointed out, he hasn’t been able to do since the start of the financial crisis.

He also nodded, briefly, at today’s labour market figures which, despite being headlined as heralding an increase in unemployment, are broadly encouraging. While unemployment is indeed up in comparison with the final three months of last year, it has fallen sharply more recently. Indeed, in the month of March alone, the unemployment rate dropped from 8% to 7.4% (though the Office for National Statistics prefers three-monthly measures).

However, both the jobs figures and Sir Mervyn’s farewell are marred by another more worrying statistic: that of average wage increases. According to the ONS, average wages (excluding bonuses) rose by a mere 0.8% in the past year. This is the lowest level of wage inflation since comparable figures began more than a decade ago, and equates to a fall in real (eg inflation-adjusted) wages of 2% in March – the biggest drop since January of last year.

Now for any policymaker who worked through the 1970s this would hardly sound like bad news: back then the problem was that wages rose at uncontrollably fast rates and unemployment went up as a result. Right now, workers seem willing to accept a cut in their real wages rather than losing their jobs.

But it nonetheless means that the squeeze on families’ disposable incomes is worsening. Households are becoming poorer, their standard of living being squeezed. Nor is it possible to dismiss this as a minor phenomenon. In fact, the median income in Britain is lower today than it was when Sir Mervyn came into office.

In 2003, when he became Governor, the average wage, in real terms (eg in terms of today’s money) was £11.24. By last year, the figure is £11.21, according to the ONS, and it will fal further this year.

But this probably isn’t the phenomenon that will define Sir Mervyn’s legacy. More likely is that he will be remembered for what has happened to the Bank of England’s balance sheet during his tenure: thanks to quantitative easing and other programs aimed at boosting the amount of cash flowing around Britain’s damaged economy, he has increased its size more than any other Governor in history. Consider what’s happened to the monetary base – essentially the amount of cash either in the hands of the public or held by banks in reserve at the Bank of England: since 2007 it has expanded by a factor of five. Not only is that more than in any comparable period in British history, it is more than any other central bank has managed during this period. This may not technically count as printing money, but it’s the closest thing you get in a 21^st century economy.

Sir Mervyn would argue that this was necessary to try to avoid a severe recession – a Great Depression-style one – earlier in the crisis. However, even he betrays some concerns about the implications.

He hands over to his successor a central bank with a balance sheet more precarious than any private bank. Happily, the Bank of England is not any bank, and can rely on the Government’s support. But this precarious situation underlines the problem: Britain has thrown everything (including the kitchen sink) at the economy, putting the Bank into unknown territory, and we are still staring stagnation in the face. One hardly envies his successor, Mark Carney, who takes on the job, and the balance sheet, at the end of next month.

The post Sir Mervyn King and his troubled legacy appeared first on The Real Economy.

The so-called sherpas – senior officials who sit in the meetings representing each country – have usually pre-written a communiqué to be issued at the end of it all, and because there’s so little time for genuine debate, the content often remains unchanged.

That, of course, makes it almost impossible to achieve genuinely ground-breaking international agreements on the economy. For instance, before the financial crisis it was clear to all finance ministers that there were deep problems with the structure of the global economy which needed to be addressed. And yet summit after summit went by, all of them failing to deal with these imbalances.

It’s only very rarely – in times of crisis, generally speaking – that the rulebook I’ve spelt out above gets thrown away. That’s what happened back in autumn 2008: as the world stood on the brink of financial disaster, ministers (meeting this time at the IMF) threw away the pre-written communiqué, dispensed with the pre-written statements and got down to business. They had a stern discussion about the risks the world economy was facing and came up with a short, to-the-point statement committing to nationalise their banks as need be. At the time, it was revolutionary.

And it was this “spirit of 2008″ that the Chancellor and Bank of England Governor were trying to summon up here at the G7 meeting in Hartwell House in Buckinghamshire this weekend – only without the immediate crisis. They made the conscious decision of doing away with the communiqué and the long opening statements, and, said Sir Mervyn King: “I can’t recall another G7 where the atmosphere was so productive – there was a genuine exchange of views, and people really engaged. As a result we made real progress in taking forward the arguments.”

The arguments in question mainly focused around three areas: currency policy, bank resolution (in other words what to do when a bank collapses) and tax avoidance/evasion. It is on the latter of these that perhaps the most progress was made. The Japanese and Germans had hitherto been quite resistant to a new scheme championed by the UK which automatically shares information on tax and individuals’ and companies’ accounting data between countries, but according to officials they displayed more willingness to sign up to such a scheme.

But cheering as it is that ministers have made some progress behind closed doors on tax, there are other deep-seated issues that remain. Central banks around the world have pumped an unprecedented amount of cash into the world’s financial veins; they have conducted fiscal easing on a significant scale. And yet, despite five years of extraordinary measures, there are still large parts of the world which remain trapped in stagnation: the UK among them. More worryingly, no-one really knows why this is, or indeed what to do to rectify this. If it weren’t so tragic, you’d call it a conundrum. And it will take more than a 24 hour G7 meeting to sort it out – communiqué or no communiqué.

The post The G7 and the “spirit of 2008″ appeared first on The Real Economy.

That is, until you look at the details of the downgrade notice. Moody’s has dropped the rating on the Co-op’s debt not by one notch, as it did when it stripped Britain of its AAA status, but by a whopping six notches, all the way from A3 to Ba3, in the case of senior debt. Tempting as it is to dismiss everything the agencies say as junk, it’s hard to ignore a downgrade of that scale: it suggests that the agency now thinks there’s a statistically significant chance that the bank will default.

It’s deeply awkward for the Chancellor – in part because he championed the bank’s now-defunct plan to buy up 632 Lloyds branches, in part because Moody’s says it thinks Co-op may need Government support in order to survive. That would cross over a red line George Osborne has set every time there is a question of whether banks might need more support: the Treasury has no intention of pumping yet more money into failing banks.

And indeed when I asked the Chancellor that question this morning – about whether he would countenance a government-funded capital injection into Co-op – he sidestepped the issue entirely. However, unlike most other banks, the mutual structure of the Co-op means it doesn’t have the option of raising shares. It must rely either on a cash injection from its parent company – the one that owns the retail stores – or must divest certain key units in order to make its balance sheet look less precarious.

In a sense it’s just another aftershock following on from Britain’s own home-grown economic crisis. Co-op’s balance sheet is particularly polluted with bad debts associated largely with the commercial property assets it picked up when it bought Britannia Building Society at the height of the crisis. The scale of the commercial property crash (there really was a crash there) means many of the loans to the sector are underwater, and given the Bank of England believes British banks are forebearing on many loans to the sector, that means there are likely to be more losses further down the road.

It’s scary stuff – particularly given the memory of what happened in the British banking system back in 2007 and 2008. But on the other hand, consumers shouldn’t panic. Unlike back then there is a decent, well-defined system of deposit insurance which will protect deposits up to £85,000 (back in 2007 the fully-insured limit was a terrifying £2,000). Moreover, new rules on bailing in depositors mean that theoretically they will no longer be near the back of the queue if there’s a collapse.

However, we are still not at that point yet. Even if it is indeed true that the bank needs external support, and the Government isn’t willing to provide it, the Co-op group has money it could put towards supporting the bank. However, with George Osborne spending today and tomorrow with finance ministers and central bankers – not to mention the International Monetary Fund, which is in the middle of its annual survey of the UK economy – the timing is awkward. A reminder, if any were needed, that Britain’s economy and its financial plumbing are in far from pristine condition.

The post What happens to banks when the economy is uncooperative appeared first on The Real Economy.

One quarter’s numbers do not a recovery make. The UK economy is still far from what anyone would regard as healthy. National income is still more than 2.5% below where it was back at the start of 2008. For that matter, it’s more than 5% smaller than the Office for Budget Responsibility predicted when George Osborne came into office.

And there is scant evidence of the rebalancing the Chancellor has long been predicting: any recent growth there has been was almost entirely in the services sector, while both manufacturing and construction (the sectors which actually make things) are, respectively, 14% and 19% weaker where they were in 2008.

All the same, don’t underestimate the significance of this moment. A negative GDP figure today – or even a slightly positive one – would have left the Chancellor with little ammunition left to defend himself. Over the past few weeks he’s been battered by the International Monetary Fund, embarrassed by the Excel scandal that’s upended the Reinhart & Rogoff research he used to help justify his austerity policies and disappointed by the fact that the public finances barely recovered at all last year – in underlying terms, at least. Had today’s figure been negative it would have made it far more likely that the IMF would have delivered a withering verdict of the UK economy in its annual survey of the country next month. The Chancellor would have gone into the spending review a weakened figure.

Today’s 0.3% doesn’t change everything but it does remind us that the economy may not be as much of a basket case as many people had assumed. Yes, growth is still unbalanced, but part of the explanation for disappointing exports numbers is the eurozone’s weakness. From hereon the news may get better. There is a decent chance that in the coming months the ONS reconsiders the last couple of years’ growth figures potentially revising away the double-dip recession.

In other words, in a few months’ time it may well transpire that – far from there being a triple-dip recession, there may never have been a double-dip in the first place.

Prospects for the rest of the year look brighter than they have been for a while. Indeed, the first quarter’s growth probably understates growth a touch, because the poor spring weather depressed activity. And, barring some disaster (and of course there have been one or two of them recently) we can expect the economy to continue growing in the coming months. Unemployment figures aren’t great, but aren’t disastrous, and the housing market is looking a little bit healthier than for a while.

Which brings us to our final (and for my money, most worrying) point. A lot of influential people within British economics are deeply worried about the new policies the Chancellor has unveiled to try to get the household sector spending again. In particular, they view Help to Buy, the Government’s new mortgage guarantee scheme, as a potentially dangerous effort both to generate another housing bubble, and to shift some of the risk associated with it back onto the Government’s books. I asked the Chancellor about this in our interview today. His response: “We’ve had a housing bust. I want to get back to a normal level where first time buyers can afford a home. That’s not a housing boom.”

Those living in areas of the country (London and the South East) with home prices higher than they were at the start of the crisis may raise their eyebrows at the Chancellor classifying this as a full-scale housing bust. Others will express concern that pumping extra impetus into the property market, which is part of what led to the domestic economic crisis in the first place, seems a touch odd.

But for the time being let’s revel in the fact that whereas much of Europe remains mired in recession, Britain isn’t.

The post GDP: finally, some good news appeared first on The Real Economy.

Here is a scheme which, according to most external analysts has so far disappointed. The International Monetary Fund believes that “so far the FLS’s impact has been limited”, the Policy Exchange says: “Funding for Lending isn’t working”, and about the most flattering thing anyone could say about it is that it has at least brought down the cost of borrowing for some mortgage payers, if not lifting actual lending at all.

Indeed, total lending to non-financial companies has dropped by around £10bn a year since the financial crisis started, and lending to small and medium sized businesses (SMEs) is down by around 3% a year.

Now, most people would look at this performance and rather quickly assume that the FLS has been a disappointment, but this is where we get to the big secret about why economists will always land on their feet: the counterfactual.

Withdrawals from the FLS may have been far lower than the big numbers trailed upon its launch; lending to most sectors of the economy may be down, but, comes the response, how do you know what would have happened otherwise? Yes, it’s the counterfactual get-out clause.

You may remember it from the debate over Quantitative Easing, where the Bank of England calculated that the recession would have been far deeper, unemployment far higher, if it weren’t for this radical monetary policy. Honest.

And now the same rationale is being trotted out again over the extended Funding for Lending scheme. Apparently, there is no way to judge whether it will be a success because there’s no way of knowing how the economy would have behaved otherwise.

Given there is no way of knowing whether this policy is or isn’t a success, I suppose the best we can do for the time being is to run through what, precisely it involves. A few bullet points:

-          The key changes are threefold: the scheme will be extended by a year so it ends in January 2015.

-          As with the existing FLS, the carrot here is that the Bank will lend banks cheap money (for which read a 0.25% interest rate above the base rate (eg 0.75% at present) in return for every pound they lend into the economy, within a pre-determined amount.

-          But this time around there is a special incentive to lend to SMEs: banks will get £10 of cheap lending for every £1 they lend to small businesses this year. They get £5 of cheap money for every £1 they lend to SMEs next year.

-          This means that, in theory, that even if a bank reduces its net lending to households, big business and credit providers by £9m this year, it will still qualify for £1m of cheap loans provided it lends out a mere £1m to SMEs this year (£10m quota for the SME loan, -£9m for the rest).

-          Thirdly, the scheme has been extended to other non-bank lenders, for instance finance leasing companies and certain mortgage lenders. In some senses this makes plenty of sense: many small businesses borrow from these smaller lenders. However, given that this will encompass buy-to-let providers such as Paragon and Precise, it will leave the Bank and Treasury open to the accusation of trying to inflate another bubble in the housing market (alongside the Help to Buy scheme).

More broadly, even the extended FLS does little to solve the fundamental problem in the banking sector: that most of Britain’s finance houses are both short of capital and fearful of lending to companies that may not be around to repay them in the future. Another unanswered and possibly unanswerable question in economics today is whether the fall in lending to business is due to demand factors (eg the businesses can’t or don’t want to borrow) or supply factors (banks can’t or won’t lend to them). Even an extended FLS cannot solve this problem.

Ultimately, the best one can say about the newly-extended scheme is that it may make lending to businesses marginally more attractive. However, we may not ever notice the difference. On the downside, it may contribute to a possible new bubble in the housing market (though not as much as Help to Buy), and puts yet more private sector collateral onto the Bank of England’s balance sheet – albeit temporarily.

However, there was another significant piece of news which also came out today which is worth dwelling on for a moment: the Government announced that it has offered a £75m guarantee to Drax Group to help it raise private funding for the conversion of its coal-fired power station to biomass.

This is the first of what are likely to be many projects supported by the UK Guarantees Scheme, which was launched last July. It’s yet more evidence of the Government taking an activist industrial policy one would rarely have associated with a Conservative Chancellor. Some will argue that this smacks of 1970s-style dirigiste policy, but others will point out that most other Governments around the world support their firms and try to attract investment. For Britain not to do so will leave it yet more exposed as the world economy struggles to recover.

UK fixed investment, courtesy of Andrew Sentance

And in a sense, that’s perhaps the best way to view both FLS and the Drax story. There is little available finance in the UK; so this is the Government attempting to use both the Bank of England and Treasury’s balance sheets to try to attract investment from overseas, and prevent it leaking out of the UK.

The post Funding for what? appeared first on The Real Economy.

I was reminded of that this morning when the latest public finance bulletin from the Office for National Statistics thwacked onto my desk. The bulletin seemed, well, considerably thicker than I was used to. So I looked back at the public finance bulletins for the same month in previous years (the March release is significant because it tots up the total amount of borrowing for the entire fiscal year, which ends in April) and here’s what I found:

That’s right: the length of the public finance statistical bulletin has more than doubled under George Osborne from a relatively slim 25 pages in March 2010 to this month’s record length of 54 pages.

It might be tempting to conclude that perhaps the font size has changed, or that the ONS has included lots of whizzy graphs to thicken out the document. The reality is that the public finances have become staggeringly complicated under this Government. I’ll give you another example: this time last year it took the Office for National Statistics three bullet points to explain the key news on the public finances. Today it took them ten bullet points.

Why? Well, in part it’s because there has been rather a lot of jiggery-pokery going on behind the scenes. Various items have been added and subtracted from the numbers with the net effect that it’s increasingly difficult to discern precisely what the numbers mean.

In theory, public finance statistics ought to be pretty simple: they are, after all, merely a ledger of how much the Government has raised in taxes, how much it has spent and how much it has borrowed in a given year.

However, these days we have a grand total of six (count ‘em) different headline measures of the deficit.

1. There’s public sector net borrowing (PSNB) – the traditional measure of the deficit. On this measure, the deficit is down this past financial year (12/13) by £19.1bn (or 20.5%) to £74.2bn.
2. Strip out the effects of financial interventions (eg the semi-nationalisation of banks like RBS and HBOS) and the deficit was £86.2bn in 2012/13 – a higher number, yes, but down by 28.7% on the previous year. This is PSNBx.
3. Strip out the impact of the Royal Mail Pension Plan, which has been added to the Government’s books, and the deficit was £114.2bn – down by a rather less flattering 5.6% compared with ‘11/12.
4. If, on top of this, you then strip out the effect of the extra money funnelled into the public finances from the Bank of England’s Asset Purchase Facility (eg profits from quantitative easing) the deficit last year was £120.6bn, down a mere 0.3% from last year.
5. It doesn’t end there, though. The Office for Budget Responsibility has also calculated a variety of the deficit which, on top of all of the above excludes the influx of profits from the Special Liquidity Scheme. On this measure, the deficit was actually £2bn higher in 2012/13 than the previous year.
6. And if you exclude the impact of the reclassification of Northern Rock Asset Management and Bradford & Bingley (but exclude the SLS impact – do keep up) the deficit was, again, higher than last year, this time by £400m.*

Now, according to Treasury sources (who have spent the morning insisting to me that today’s public finance figures are “hardly very complicated”), the only figures from above to pay any attention are 2) PSNBx and 4) PSNBx excluding the Royal Mail Pension Fund and QE profits. On both of these measures, the deficit has fallen, although in the case of the underlying measure (4) it’s only by a few hundred million pounds, which in the realms of public finance numbers is essentially a rounding error.

One can draw two conclusions from today’s figures. First, Government borrowing is more or less flat. Or, to quote the ONS’s comment on that underlying measure of borrowing, the deficit this year was “similar in level to last year’s borrowing”. Trying to claim either that borrowing is falling or rising is disingenuous – it’s splitting hairs.

Second, the numbers have become so densely complicated that they risk obfuscating what is really going on. Whether this is by accident or design is a moot point: complexity started to creep in under Alistair Darling when the banks were first nationalised, but it has ratcheted up since then. And the more complex the numbers get, the more skeptical people will be when the Chancellor uses them to make political hay.

The fact remains that whether the deficit is a touch up or a touch down, it’s nonetheless massive. If you take even the distorted PSNBx measure (number 2. above) it is, at 5.57% of Britain’s gross domestic product, double the level it was even at the height of the Brown borrowing period. It’s still the highest since the early 1990s.

Back at the turn of the millennium Britain’s total national debt was equivalent to around 30% of GDP (see chart above). Today it’s up at 75% of GDP. That’s the highest level since Britain was recovering from the trauma of World War Two. This, in the end, is why Moody’s and Fitch have both concluded that Britain does not deserve a AAA rating, and why there remains consternation about the future plight of the UK economy.

* Long as this list seems, I’ve actually spared you some other measures of borrowing, such as the net cash requirement, which measures how much the Government is actually having to raise on the markets to finance that borrowing through bond auctions.

The post What’s really going on with the public finances appeared first on The Real Economy.

Good – but not quite as good as the fall in borrowing costs enjoyed by the US when it first had its AAA stripped back in 2011. Its 10-year borrowing rate dropped from 2.56% to 1.89% – a fall of about a quarter.

Yes, I know there’s a lot else going on here, but you can’t help but wonder: perhaps investors don’t merely ignore the ratings agencies, maybe they treat them as a contra-indicator.

The post Downgrades: an observation appeared first on The Real Economy.

“Welcome to Twitter @George_Osborne,” read the public message from @Lagarde, “see you in two weeks at the 2013 IMF/WB spring meetings in Washington, DC”.

It was, it turns out, the only personal tweet that Christine Lagarde sent to any other finance minister in the run-up to this past week’s Spring Meetings in Washington DC.

This is no coincidence. Lagarde and Osborne really are good friends. They talk regularly (and not just on Twitter); they have a genuinely warm personal and professional relationship. Osborne was the first major finance minister to endorse Lagarde for her post as managing director of the International Monetary Fund and she, in turn, has always been steadfastly and publicly supportive of his economic policy.

Last summer, Lagarde made a personal appearance at the UK Treasury to unveil the Fund’s annual assessment of the British economy, and endorsed the Osborne economic plan. She memorably said that when she tried to imagine what the public finances would have looked like without the Chancellor’s austerity measures, “I shiver.”

Such interventions have been politically, if not economically, important for the Chancellor. They reinforce the notion that he is not merely an austerity obsessive: that his plans conform to mainstream economic wisdom. Like the support of a ratings agency, or indeed of economists like Carmen Reinhart and Ken Rogoff, IMF approval is a useful shorthand for economic credibility – something you need when you’re facing the longest slump in modern history.

And even as the Fund’s professional assessment of the UK economy’s health turned negative over the past year, Lagarde’s support for Osborne has remained unwavering. Earlier this week in Washington, the IMF chief economist, Olivier Blanchard said Osborne would have to reduce the pace of his spending cuts, adding that the Chancellor was “playing with fire”. The World Economic Outlook said, in black and white, that “greater near-term flexibility in the path of fiscal adjustment” was necessary in the UK – economese for “you need to consider plan B”.

And yet when asked about Britain, Lagarde offered a far more equivocal verdict: there was “nothing new” in the Fund’s assessment that the UK should be ready to change course if and when economic growth disappointed – though she conceded that “the growth numbers are not particularly good.”

This difference in tone has been useful for the Chancellor. When asked in a domestic press briefing about Blanchard’s criticism, Osborne quoted Lagarde’s comments at length, dismissing the chief economist as “just one voice”.

However, the reality, according to a range of Fund insiders, is quite the contrary. They point out that the institutional IMF view is far closer to Blanchard’s opinion than Lagarde’s. That in some respects it is Lagarde who is the outlier.

In fact, some Fund officials were privately aghast when they heard Lagarde claim in that press conference that there was “nothing new” in the Fund’s position on the UK. One told me that within the Fund some were muttering that Lagarde’s good relationship with the Chancellor – and her consequent efforts to be diplomatic – were undermining their overall message: that Britain must change course.*

Whether that message will actually make any difference is moot. Plenty of finance ministers have disagreed with the Fund in the past. The Americans did in the 1980s. Gordon Brown got angry with the Fund during his Chancellorship when it advised him to scale back on his borrowing. Likewise, Osborne is furious with Blanchard, considering that the chief economist has unfairly singled out Britain when other countries are just as worthy, if not more worthy, of the same criticism.

But that doesn’t change the fact that for the first time since taking office, he is now on the wrong side of the Fund. And if there were any doubt about the true IMF position, it has now been laid to rest by Lagarde’s deputy, David Lipton. In an interview with Sky News, he says, explicitly, that when it comes to Britain’s budget, “the pace of consolidation ought to be reconsidered”. The precise numbers, he signalled, would have to wait until the Fund’s official survey begins next month, but the verdict could hardly be clearer.

The intervention is particularly significant given who it has come from. Lipton is not a household name; he is not on Twitter. But not only is he Lagarde’s deputy, he is the man who will take her place to unveil the ominous findings of the IMF assessment in London next month. It’s enough to make George Osborne shiver.

* Although the MD did offer a slightly tougher message when pressed repeatedly in an interview with BBC Hardtalk later in the week.

The post The IMF vs George Osborne – the inside story appeared first on The Real Economy.

The International Monetary Fund’s chief economist has warned George Osborne that he is “playing with fire” with his fiscal policy.

In an interview with Sky News, Olivier Blanchard also said that the Chancellor should have changed his austerity strategy at the Budget last month. The comments came as the IMF unveiled new forecasts which showed a dramatically weaker outlook for the British economy.

Asked about Britain’s prospects, Mr Blanchard said: “I think conditions have deteriorated. There is no question that the fiscal plan – which was designed a few years back – was assuming that private demand would be stronger than it is. So the question is what do you do. Well the first line of defence is you let the so-called automatic stabilisers play. That has been done, that’s good. But then at some stage you actually have to sit down and say: do we continue?

“The danger of having no growth, or very little growth, for a long time is very high; you get a number of vicious cycles which come into play… The result is that [people] don’t spend, output is low.

“And I think you’re playing with fire when you get to very low growth rates so… if you can decrease the speed of fiscal consolidation maintaining  the credibility (so it’s not a question of whether, it’s a question of when), when growth is close to zero I think yes it’s worth considering.”

Asked whether Mr Osborne had wasted the opportunity of the Budget, Mr Blanchard said: “Well, “waste” is too strong, but they surely could have done more, yes.”

The comments are likely to infuriate the Treasury, which has insisted that its austerity plan is the only sensible course for the UK, and that Mr Blanchard is wrong. The chief economist said his response to this was: “That I think that I am right and they are wrong.”

Here’s the full transcript of our interview with Mr Blanchard, in which I started by asking him about the notion of a “three-speed” world – something he talked about in the World Economic Outlook:

Blanchard: We used to make this distinction between emerging markets and advanced economies. Now you have to make a distinction between emerging markets, which are still doing well, but within advanced economy you seem to have increasingly two groups – the main representative of the first is the US where all the forces of recovery seem to be getting in place. And then you have mostly Europe – particularly the euro area. What worries us is this bifurcation.

Q: Where does the UK fit in there?

A: The UK probably fits closer to the euro area in terms of results. Its growth performance is clearly not very good. But in terms of the flexibility of the country, which is not in a common currency area, and has a different set of tools potentially. So in terms of results, if I had to put them in a box they would be in the European box. But they are clearly different from the problems faced by Spain, Italy and France.

Q: Outlook for the UK not great. Downgraded them more than others. Why?

A: One should not make too much of the size of revisions – it’s true that the UK we’ve revised down by 0.3% where we’ve revised the eurozone by 0.2%. This is small differences within the margin of error, but it’s true that the UK is not doing great. It’s difficult to put your thumb on what exactly it is that is leading to those poor results. you go through the list of all the components of demand and they are all doing a bit worse than you’d hope. It looks as if exports are doing a bit worse – some of that is due to the fact that the world is not doing great. But market share is not improving. Deleveraging by banks seems to be a bit stronger than was assumed and there is some question as to whether the banks are really in as good a state as we thought. So all these things are adding up – I don’t think there is any particular aspect to it. And fiscal consolidation clearly is contributing to this as well.

Q: You’ve said in the past if economic conditions deteriorate the UK needs to consider. You don’t say that about economic conditions this time

A: I think conditions have deteriorated. There is no question that the fiscal plan – which was designed a few years back – was assuming that private demand would be stronger than it is. So the question is what do you do. Well the first line of defence is you let the so-called automatic stabilisers play. That has been done, that’s good. But then at some stage you actually have to sit down and say: do we continue? The danger of having no growth, or very little growth, for a long time is very high. You get a number of vicious cycles which come into play – banks have bad loans. Then they don’t want to give credit because they are not strong. You get people dropping out of the labour force. You get what strikes me – and this is increasingly relevant in many countries – a decrease in confidence. People saying we are never going to get out of it, so I have to be careful with my spending, let’s wait and see if things improve, so I’m going to be very careful with my investments. Banks say in this environment loans are very risky, and in the process of doing this it’s self-fulfilling. The result is that they don’t spend, output is low. And I think you’re playing with fire when you get to very low growth rates so… if you can decrease the speed of fiscal consolidation – maintaining credibility so it’s not a question of whether, it’s a question of when – when growth is close to zero I think yes it’s worth considering.

Q: You talked before the Budget and said it was a good opportunity.

A: Yes

Q: Do you think they wasted that opportunity?

A: Well, “waste” is too strong, but they surely could have done more, yes.

Q: Can you give some indication of how much more [in terms of slowing the fiscal consolidation]?

A: When you get to the numbers, that’s the kind of job that can be done best by our mission which goes there next month sitting down with the authorities and taking

Q: A lot of people would look at forecast and start to think that you’re picking on the UK. Why don’t others, for instance Germany, get the same language about too much fiscal consolidation?

A: Well, ironically, while Germany is very tough they need to do less fiscal consolidation because they were in better shape to start with. They are actually not doing a whole lot: they are doing what’s needed – which is little. So in fact if you’re going to pick on a country you’re not going to pick on Germany. The country you might want to pick on is the US. where again the consolidation is worse as a result of political accidents the US is having a very very strong fiscal consolidation. It’s 1.8% of GDP. Now we argue that that is too strong. But the difference is that this is in an environment in which private demand is strong. It may be that without fiscal consolidation the US would have say 4% growth or 3.5%, and with fiscal it’s going to be around 2%. That’s not good, but 2% is not catastrophic. Once you have strong private demand you can do strong fiscal consolidation. But when you start with very weak private demand and you do fiscal consolidation on top of that – then there is an issue.

Q: And that’s the UK that we’re talking about?

A: That’s the UK.

Q: People within the UK are adamant that they have chosen the right course. They are adamant that they are right and they think that you are wrong. How do you respond to this?

A: That I think that I am right and they are wrong [laughs]. As I’ve explained, comparing it to the US is the wrong comparison because in the US everyone agrees that as a result of this problem between Congress and the President we’re having too much fiscal consolidation so that’s not the benchmark to use.

Q: Cyprus – a sign that the euro crisis is still there, or an aberration?

A: It is a very special case. I don’t think more should be made of it as what happened. What we’ve seen is that it doesn’t lead automatically to contagion – so far not much has happened.  The signal that there should be bail-in when bail-in makes sense is a good signal. It’s unfortunate that it had to fall on uninsured depositors. This would probably not be the case elsewhere because there would be some other debt in wholesale funding. But in the end although it was a messy process – everybody agrees to this – I think we’ve learned that systemic risk may not be enormous, can be contained and we probably have done things reasonably well in the end.

The post Blanchard: UK economic policy is “playing with fire” appeared first on The Real Economy.

Today I can finally talk publicly about a project I’ve been working on for the past three years. Next summer, Little, Brown will publish my book about the Bretton Woods conference of 1944. The working title is: The Summit: Bretton Woods and the Fight to Save the World’s Economy

Despite how grand that sounds, this is, at heart, a human story: about a group of the world’s most extraordinary people (many of whom would go on to lead their countries), how they came together to try to prevent a third world war. It is about how they fought each other, how they celebrated and socialised with each other, about how they tried to bridge their differences in the rooms and corridors of the Mount Washington Hotel in New Hampshire.

These people – everyone from Britain’s John Maynard Keynes and America’s Harry Dexter White to France’s Pierre Mendes France and China’s H.H. Kung – weren’t merely the economic titans of their generation. They were a unique set who believed that they really could change the world for the better and, crucially, could do what the delegates at Versailles a quarter of a century had failed to do: mend the global economy.

Bretton Woods can reasonably lay claim to having been one of the most significant international conferences of the past century. It may not have had heads of state such as Churchill or Stalin, and yet it was nonetheless momentous and unprecedented in ways no other summit since has managed.

For one thing, it was the first and only time in history that the world’s leading countries overhauled the structure of the international monetary system – rules about the levels of exchange rates, about the flow of trade and capital from one country to another. Every other shift in the fundamental building blocks of the international economy, from mercantilism to the Gold Standard to today’s era of floating currencies and fiat money, happened almost inadvertently. At Bretton Woods, some of the world’s leading economists came together with a blueprint for changing the way the world worked for good. Oh, and in the process they set up the International Monetary Fund and the World Bank.

For the relatively short period it was in place, the Bretton Woods system really did seem to work. It led to the longest period of strong and stable economic growth in history. There were fewer recessions; there were almost no banking crises. In fact, many of the issues that we associate with today’s global financial crisis – inequality, current account imbalances, banking’s dominance in economic policy – really only started to build up after Bretton Woods came to an end in 1971. It’s no wonder that so many politicians of all ideologies have been calling for the past decade or so for a “new Bretton Woods”.*

There have already been a few books which have covered Bretton Woods over the years, so one might reasonably ask why on earth we need another one. The first reason is that, excellent as many of the older and more recent books about the conference have been, most have been aimed not at the general reader but at economists and aficionados of economic history, published by academic publishers for a largely academic audience. I believe that Bretton Woods deserves a far wider audience, and that the drama of what happened there merits it.

What I hadn’t realised until I read the accounts of those who attended was how great was the level of tension and emotion permeating events. As one attendee remarked at the time, the whole thing had the air of a murder mystery – and yet it has mostly been covered with the air of a dry economic account.

I hadn’t realised how much on-the-ground drama there was at the conference itself: the extraordinary pressures – both emotionally and physically – on the delegates, and how they frequently exploded into the negotiations. I hadn’t realised how close the conference came to collapse (indeed, until the very final moment, it looked to many there to have been a flop). I hadn’t realised there was so much going on behind-the-scenes, the drinking, the dancing, the romancing that happened after hours even amid 18-hour days of negotiations. My book will cover all of this (and believe me it really is compelling). It will also reveal the full extent of Communist activity at the conference, which went well beyond the long-established fact that White, the head of the US delegation, was passing secret information to Soviet intelligence.

And there is still a wealth of unpublished material about what happened at the conference which even today has simply never seen the light of day.

Moreover, the events of 1944 are a reminder that the problems we face today are only modern-day echoes of many of the issues that were dealt with back then: the excessive power of the financial sector; the swollen imbalances between creditor and debtor nations; rising inequality; a currency union which imposed deflation on unwilling populations (back then it was the Gold Standard; today it is the euro).

Almost every one of the major issues I find myself discussing on Sky News on a daily basis was dealt with in one way or another at Bretton Woods: the question of how indebted countries could be resuscitated; how countries with surfeits of savings (for which, read the US in 1944, Germany and China in 2013) could be compelled to spend them; the extent to which countries receiving bail-outs cede their sovereignty to others; the importance or otherwise of free-wheeling financialism.

I believe we can learn far more from what happened in Bretton Woods than from the prognostications of today’s breed of wise men and women.

It is not merely that We Have Been Here Before: it is that the greatest minds of the 20th century actually had a rare opportunity to try to reshape the world to remedy these problems.

The book, whose release next summer will coincide with the 70th anniversary of the summit itself, will be a story of the men and women behind this experiment.

* Yes, yes I know there are plenty of valid questions about the extent to which Bretton Woods itself was responsible for post-war stability. Believe me, this will be covered in some length in the book.

The post Coming next year: The Summit appeared first on The Real Economy.

There are few policymakers who have a unique insight on all three of them, but David Miles is one such man. As a member of the Monetary Policy Committee, he actually has a say on how much stimulus the economy needs at any one time (and indeed has recently been voting for more Quantitative Easing in recent months). As a former employee of Morgan Stanley, he has taken a close interest in how to resolve the inherent deformities of the banking system, and has suggested that banks should hold significantly more capital – perhaps even double the amount they are currently compelled to have. And as an expert on the mortgage market and former adviser to Gordon Brown on this topic, he knows more than almost anyone else about how to reform it to cure the housing market’s problems.

This morning we at Sky News had an extensive interview with Dr Miles. The news story is up on the Sky News website and the extended highlights of the interview are on the Sky News iPad app and will be on the Jeff Randall Live show tonight, but here are a few of the key elements (the stuff in bold and italics is me, the bits below are direct quotes from Miles):

Growth has been “extremely low”; in economic terms “It’s a difficult situation we start from”

Whether or not GDP falls by 0.1% or rises is not the difference between disaster and success for the economy. The big issue is: are we going to see a return to something more normal in growth terms? And growth has been extremely low. The outlook is not for a rapid pick-up in growth. At the same time inflation is uncomfortably above the target level. We are on the wrong side of the target still. It’s a difficult situation we start from, no question.

The growth outlook remains troubling and rather weak.

We need a “very, very expansionary monetary policy”

I think it is much more likely than not that the inflation rate will gradually move back down towards the target level. But it does so in an environment where growth remains very weak. That’s why I think it makes sense for us to assess where the trajectory of inflation is likely to be – downwards – and to set monetary policy in a way consistent with inflation coming back to the target but also to support growth. And I think at the moment that implies having a very, very expansionary monetary policy.

“Evidence is not compelling that the strength of [QE] is identical to what it was [in 2009]”

I think the mechanisms through which QE works remain similar to what they were in the past. That mechanism is still in place. Whether it’s exactly as strong as it was in 2009 is a bit difficult to judge – we are in uncharted territory – and the evidence is not compelling that the strength of the mechanism is identical to what it was then. But to me it’s clear that more asset purchases are a way of making monetary policy more expansionary.

Bank of England’s new remit is a “clarification” not a revolution

It’s a clarification about the flexibility that has always existed in the remit. I think the requirement to explain better and to focus more upon the trade-offs in bringing inflation back to the target is not insignificant. The changes are helpful but they also reflect the fact that there are great advantages [to the existing flexible inflation targeting remit].

British banks need more capital, but claiming this will mean they have less to lend out “makes very little economic sense”.

Those people who seem to believe that banks using more equity capital and less debt must hold back growth are putting far too much emphasis on what is a mistaken analysis. There is a view – you hear it quite often in the media, you hear many senior bankers espouse the view – that somehow having banks using more equity capital is detrimental to lending, is sucking money out of the economy; that it’s money that has to be put aside, that a bank can’t use in the economy – a pot that sits in the corner.

That makes very little economic sense. When a bank is asked to use more equity funding it has more money to lend – not less.

I don’t think it’s an accident that those banks which have had their capital position move to a weaker position are the ones which have the weakest lending.

So it’s actually quite the opposite of what has become the conventional wisdom.

The economics of it don’t quite add up.

Government’s Help to Buy scheme (guaranteeing mortgage lending) “doesn’t make much sense as a long term structure”

Having the government offer mortgage guarantees now and in perpetuity doesn’t make much sense and I’m sure that is not the intention of the scheme.

I would make the general point that one needs to draw a distinction between policies brought in in an unusually difficult economic environment, and policies which are brought in to change the economic framework

On whether Help to Buy could become a kind of British Fannie Mae:

I’m sure that’s not the government’s intention and it would be pretty undesirable if that’s the way it went.

The post David Miles on the economy, QE, banks and Help to Buy appeared first on The Real Economy.

There has been much talk this morning about how much of the economic success of the Thatcher years was due to North Sea oil. Rather than write a whole new blog about this, here is a column I wrote about it in the Telegraph back in 2009. The one thing which I suppose does date the column is its omission of the shale gas phenomenon, though it does say it is likely that other forms of energy would likely make our fixation with oil unnecessary in the future.

Anyway, here’s the column:

What was the industry that powered Britain towards prosperity in the 1980s, and made us one of the most dynamic and successful nations in the Western world? I’ll give you a clue: it was described by a prime minister as “God’s gift” to the British economy; its revenue stream pumped ever larger amounts of cash into the Exchequer – and its subsequent collapse has helped send the public finances spiralling towards disaster.

The post Thatcher and North Sea oil appeared first on The Real Economy.

Transforming Britain from a high-spending high-taxing economy into a leaner one

- When Margaret Thatcher became Prime Minister in 1979 the top rate of tax was 83%; by the time she left it was 40%.

- Under her aegis government spending dropped from 42.7% of GDP to 39.2% of GDP (though it actually rose for much of the 80s, and health spending never really fell).

The blunt economic data are more equivocal

- Average earnings increased by 181% during her time in office, compared to a 63% increase in the following 11 years.

- However, unemployment was actually higher when she left office than when she arrived at Downing St (9.5% in November 1990, compared with 5.3% in 1979.

- But since 1980 GDP per capita has increased more in Britain than in the US, Germany or France, according to figures from the LSE’s Growth Commission.

The social story similarly so:

- Home ownership flourished under Thatcher: the total number of Britons who owned their own property rose by around 2.5m and kept rising.

- Although overall earnings in Britain rose during her Prime Ministership, the gap between rich and poor widened. When Thatcher came into office in ‘79 the top 1% of Britons were earning abt 6% of total UK income. By 1990 they were earning 10%, according to figures from the OECD.

Inequality – top 1% income share 1910-2008

However, what the statistics don’t show you is the extent to which the economy we are living in today is very much a Thatcherite one.

Britain’s industries are more privatised across-the-board than in pretty much any other developed economy, including the United States. Britain is not in the euro (Thatcher was one of the biggest opponents of joining) and still has its annual rebate from the European Union. Following the “Big Bang” reforms in the City during her tenancy, the financial sector has become more and more important to the UK economy. In her time in office the percentage of Britons working in the financial sector jumped from 3% to 4%; the size of the banking sector (measured in terms of the total sector’s assets) rose above 100% of GDP for the first time; it would go on to above 500% of GDP before the crisis.

And if you’re after one substantive example of the legacy of Baroness Thatcher, you need look no further than the way the labour market has behaved since the crisis and the recession.

Unemployment is the dog that hasn’t barked in this slump. Despite this being the deepest and longest-lasting depression on modern record, the unemployment rate has peaked at no higher than 8.4%, compared with peaks of well over 11% during the recessions of the early 1980s. To a large extent this owes itself to the supply-side reforms imposed by the Thatcher government – the declawing of the unions, the stripping-back of employment regulations, controls on pay.

The reality is that Britons have accepted unprecedented real pay cuts in exchange for keeping their jobs. If you’re after modern-day evidence of supply-side reforms in action, there it is. Like it or not, it is hard to imagine anything like this happening in the Britain of 1979.

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