Political Economy

It isn’t just David Cameron schmoozing this idea. Now POWER2010 http://www.power2010.org.uk have jumped on the bandwagon whilst engaging in a very worthwhile exercise in deliberative democracy. That deliberative democracy is not the solution to our current woes, that it is not without its problems, one being the narrow basis on which policies are selected – a scientifically chosen sample of 130 individuals (my emphasis) – is clear from my rant below. However do not let this dissuade you from going to their site and voting on what you think are the most important issues for democracy today.

One question I would like to know the answer to is who was allowed to vote on this issue. If it was just the  “scientifically’ chosen English amongst the 130 then that is one matter. However if it was everyone then the vote is invalidated straight away – The English have never been allowed to vote on devolution in Wales, Scotland or N. Ireland!

How Power 2010 could have failed to select an English Parliament as one of their issues I do not know. Over 50% of voters in England regularly support the idea in opinion polls. They do so because an English Parliament gives the people of England  a government of the English, by the English, for the English, just as the Scots, Welsh and N. Irish have for themselves.

Having a glorified Commons Committee, subject to the other nations simply because it is a committee of the House, does not provide a government of the English, by the English for the English. And what will happen after the Commons? Will the bill go through to the Lords to be adjudicated on by the Scots, Welsh, and N. Irish?

Does this proposal require that Cabinet Ministers for devolved matters (Health, Education, Transport, Justice and so on) only come from English constituencies? And will these and only these Cabinet Ministers make decisions in Cabinet about English matters, sitting on the English, yet again, sub-committee?

A clearer example of confused thinking and poorly thought out logic is difficult to find.

Currently three, 75%,  out of the four nations, having 16% of the population, have their own government. In round terms 20% of the people have 80% of the democracy! This is a clear and absolute nonsense and no clearer example of Pareto’s Principle need be given http://en.wikipedia.org/wiki/Pareto%27s_principle.

When Jack Straw (Lord Chancellor and Secretary of State for Justice in the Westminster government, that most racist of governments!) claims that the English cannot have a Parliament because they constitute 84% of the population he is not showing his ignorance of Pareto. Misquoting Pareto is a ‘cunning plan’ based on a clear assumption that the electorate are a bunch of ignorant idiots who will not recognise his statement as a misquote, but rather treat it as a clever analysis of the issue, which it is not.

Do not vote for this committee approach. It is disrespectful to the English, it makes the English less equal than the other nations, it is extremely unfair to the English and worst of all it will not work!  Better by far to have a Parliament for the English, an elected House of Lords and a House of Commons with, in total, no more elected representatives than currently are elected or debate matters. No extra cost and much greater democracy!

I suppose Power2010 will come up with the usual excuses for putting forward this idea, along the lines of “It wasn’t us gov.”, or “I was only following the rules” or “The committee we appointed made these decisions” -  (whine, whine, whinge, whinge). Shame on you! This is a disgrace!

David Cameron’s motive for putting the idea forward is clearer. He has already said that he does not want to be “Prime Minster of England”, conveniently forgetting, or perhaps never understanding, that the devolved governments are led by a First Minster and not a Prime Minster – not much respect for the English there, then. The real reason he made the remark is of course about Power. It is correct that most of the work of government occurs in the matters that are devolved; Justice, Health, Education and so on. This means that most of the key levers for getting re-elected or gaining the confidence of the electorate are in devolved matters. Given that 84% of the votes are in the 84% of the devolved English matters you can see how Cameron, Clegg and Brown (and Straw) want to keep these matters within reach of their sticky fingers, close to their greedy hearts and out of Control of the English for ever.

It might be of course that Cameron just wishes to distance himself from Bonar-Law an earlier Conservative Prime Minister, a Scot, born in 1858 in New Brunswick (the Canadian Confederation did not occur until 1867) but raised in Scotland, who referred to himself as the Prime Mister of England [The Making of the English National Identity by K. Kumar, ISBN 0521777364]. Bonar-Law became leader of the Conservative Party  after Aurthur Balfour (also a Scot) and became Prime Minister in 1922 but sadly had to resign in 1923 due to throat cancer. His was the shortest Prime Ministership of the twentieth century and he is known as the Unknown Prime Minister. A name Cameron will not want!

I initially planned to post this in November. However the economic outlook was confused at the time, typical of a turn in the economy, and since I wanted to encourage readers to make their own decision I decided to wait a couple of months.

The Bank of England helpfully provide a pamphlet to explain Quantitative Easing (Q.E.) http://www.bankofengland.co.uk/monetarypolicy/assetpurchases.htm#

In this the Bank explains that its approach to Q.E. is to purchase assets from private sector institutions, banks, pension funds, insurance companies and non-financial firms, for example. They do this to ensure that the risk of banks holding on to the money is ameliorated. If the Bank buys gilts from a commercial bank the money will end up as reserves of that bank and is capable of being lent on, subject to the bank’s desired reserve ratio. If the Bank buys its gilts from a non-financial firm or a pension fund the money will eventually end up in a deposit account in a bank, where it is available for lending on, subject to the bank’s required reserve ratio. The money supply effect will therefore be similar.

In its pamphlet the Bank describes it monitoring process. It will monitor

1. The terms and conditions offered on loans?
2. Are corporate debt markets easier for companies to borrow in?
3. What is happening to asset prices (such as shares and house prices)?
4. Are banks lending again?
5. What is happening to the supply of money?
6. Is household spending increasing?
7. Is company expenditure increasing?
8. What is trend in inflation?

Whilst the Central Bank is buying government securities and lowering the interest rate, the government, struggling to deal with reduced tax revenue as a result of the recession, will be selling government securities and finding it is helped by the central bank buying them in. This is called ‘monetizing’ the government’s debt.

In effect the government is printing money to buy its own debt. There is a risk that the government will become addicted to monetizing its debt, pimping its central bank to buy more and more. The classic case is, of course, Zimbabwe where things went so far that in the end the currency had to be junked. In truth many Central Banks are up to it.

But this is not the only economic stimulation in the UK. There is the matter of the governments deficit budget spending. Currently in excess of £175 bn in the current financial year this provides a huge stimulus. Moreover Prime Minister Gorden Brown is driven not by financial prudence, but by a constant concern for his image and by his reckless desire for reelection  at any cost, to anyone. As a result we are told that this stimulation will go on for years. This season should remind us that after the gifts of the kings there followed the slaughter of the innocents!

This gives the chancellor and the Bank three choices. The first is to stop or reverse Q.E. whilst continuing with the budgetary stimulus. The second is to continue or stop Q.E. whilst reducing the budget deficit by a material amount. The third is a mixture of the two. For example this could mean stopping Q.E. whilst making some adjustment to the deficit by increasing taxes generally or cutting government expenditure. A start on the latter has been made by the recent increase in VAT back to its original 17.5%.

If Q.E. is not reversed there are two key risks. The first is that there will be a large stock of bonds in the Bank’s hands “overhanging” the market. This is likely to lead to higher volatility and possibly higher interest rates as a result. The second risk is inflation, possibly severe inflation, and a return to a credit boom. The risk of cutting budgetary expenditure is increased unemployment and reduced demand in the economy.  It seems that you are dammed if you do and dammed if you don’t!

So, let us get back to basics and see what is happening to the eight indicators of the Bank of England.

1. Loan terms. A recent report in the International Financial Review was entitled “From Famine to Feast – a review of the corporate bond market”. The bond markets were open for the entire investment grade spread
2. In Europe certainly corporate borrowing appears easier.
3. Asset prices are increasing
4. Banks are lending but the government has had to increase its support for SMEs
5. The liquidity preference of corporations and individuals is still high
6. We have seen record retail spending this Christmas
7. The trend of company expenditure is not yet clear.
8. Inflation is increasing.

So, what should the Bank of England do? Is it time to reverse Q.E. or are the hints of the Chancellor, that there will be budget cuts, sufficient to dissuade them from this action?

Why not make your own choice and take part in the polls on the sidebar?

Next post will be on climate and weather and how the government and local authorities could have made better forecasts of the chance of cold weather than they appear to have done. There really is no place for the string of excuses we have been treated to!