Wednesday, January 20, 2010


(photo shows a BoE Beadle wearing the knew lightweight uniforms to replace the older heavy serge quality uniform - they, by the way, hate the new cheap style and want to return to the old uniforms, heavy and warm - BoE fashion advisor take note).
Bank of England Governor Mervyn King gave a speech at Essex University (his first since last October - a silence many assumed was because he was snowed in by complex calculations). The speech was 'meadia spun' by the BBC to suggest its focus was a severe criticism of government policy, and of No.10 more than No.11 Downing Street - an example of trying to eke a political story out of an economic one, a speech that was subtle, complex and a tour d'horizon of certain matters treated skillfully, subtly, perhaps too subtly for the broadcaster?
A clinically sober reading of the speech sees facts about the economic system's way of working described without implied political criticisms. Yet, BBC Radio 4 and BBC news web-site dramatically spun Mervyn King's speech(20 Jan) to read between the lines what was not there i.e. criticism of Government.
Full Speech:
The journalistic spin is summed up by "Mr King's remarks may have been aimed as much at number 10 Downing Street, as number 11" and in a pre-election climate there are those who would love to read the bank of England as favouring a change of government?
See last para.
The journalist's implied view is that King was saying a higher savings rate is hindered by the government's deficit. But, to a trained economist, that makes no sense. Savings always rises and falls in exact proportion to GDP as government deficit rises and falls; they are national income accounting counterparts!
The quote "a key element in raising the national saving rate is the elimination over time of the structural deficit in the public finances". This states what is a factor, not what direction it is working in. UK savings rise as an exact counterpart of government deficit has been rising for many months in the same period as the budget deficit, and since Sept.08 to Nov. 09 (last published data), all UK sterling savings rose 10% and bank deposits by 50%. See Table B1.2
The quote, "But uncertainty about how and when fiscal policy will respond has a direct bearing on monetary policy. And markets can be unforgiving" is also cited loosely without direct comment or explanation, leaving it like a hanging chard as if implying political criticism. But as everyone should know uncertainty in monetary and to a lesser extent fiscal policy in their details are normal and necessary.
All that King wanted by saying this was to emphasise importance of statements adverting 'fiscal sustainability' - why, because he said markets gyrate around preliminary data yet to be much revised in hindsight, for which we can read spin to exploit unreliable data, and to say that new data in the next few months will be very much like that, but not to worry. He ends by saying what all empirical economists know that data remains unreliable for 2 years, which must have been his main point in the speech.
The first news about the speech on Radio4 was that King had said something like recovery would be hard and take maybe a decade - that seems later to have been dropped because it was not in the speech.
When King referred many times to 'saving' mainly about 'high-saving' countries he meant trade surplus countries and 'low saving' trade deficit countries. Most of the speech was about world trade imbalances - all of which the BBC ignored in favour of one reference to saving in UK, by which he mainly meant the need to reduce the UK trade deficit, and if there is an implicit message it is that in regard to 'national savings rate' and not household savings per se directly. Therefore if there is political criticism at all implied, it is to structure the fiscal impulse and to time the deficit reduction with respect to the economy's external account!
The key policy phrase in King's speech is actually, "Looking ahead, monetary and fiscal policy together must help to bring about a switch of demand from private and public consumption to net exports and business investment as the recovery takes hold."
There is a real credit crunch story here, which is that this is a repeat example of what the central Banks were saying, if too subtly, almost quarterly in recent years to all banks in credit boom economies, to very sensibly advise them to shift their lending away from mortgages, finance, and consumer loans, to industrial sectors whose borrowing from banks remained static or falling for a decade, as did Government's borrowing and debt, while mortgages, financial services and general private debt tripled causing the asset bubble. Banks ignored the message, not seeing in it an order to rebalance their loan books to care for economic sustainability. For your information, to take one example, lending to all small businesses in UK (half of private sector jobs) is only 5% ratio to GDP when all domestic economy lending by banks is roughly 40 times bigger!

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