Thursday, 12 May 2016

Nobody move or sterling and interest rates get it!

Yesterday's Project Fear output, via MBK:

From The Times:

Leaving the European Union would immediately cause the value of the pound to plummet by as much as 20 per cent, while income tax would have to rise to counter cuts in migration, a respected think tank has warned.

A vote to leave would result in a “significant shock to the UK economy”, the non-partisan National Institute for Economic and Social Research has said, as it presented prospects for the UK up to 2030 in the event of Brexit.

From The Telegraph:

The Bank of England will need to raise its key interest rate or Bank Rate to 3.5pc by the end of next year if Britain votes to leave the EU, the newest recruit to the Monetary Policy Committee has warned privately.

Michael Saunders, who was chief economist at Citibank, and will join the rate-setting MPC in August, said the drastic rise would be needed because Brexit would cause the pound to collapse, which would send inflation sharply higher.

If we were to stupid enough to reduce 'good' immigration (younger, healthier, skilled/working, ready to integrate) then yes, income tax rates on everybody else might rise a bit, some people say that would be a price worth paying. I don't think it is, but clearly, if we reduced 'bad' immigration, tax rates would go down a bit, which looks like a win-win to me.

The rest of their logic seems to be [unspecified cause] = GBP falls = inflation rises = Bank of England has to increase interest rates.

There's no particular reason to assume that Brexit would cause GBP to fall that dramatically, but even if it did, what would be the knock-on effects? No need to ponder too hard, let's just look at the last two instances of this happening - after Black Wednesday in 1992 and between 2008 and 2012, when GBP fell by a quarter each time.

There was surprisingly little impact on consumer prices (putting land prices to one side) in either instance, and the Bank of England did not increase interest rates - during both periods it actually reduced them (leading to land price inflation).

So nothing to worry about, as per usual.


Lola said...

What's more, IMHO, Mark Karno is talking out of his arse. If anything, once the 'markets' realise that the UK is no longer on the hook for trillions of euros of contingent liabilities, the GBP will be in demand and its buying power vis a vis other currencies will rise.

He is also thoroughly confused about inflation and what it actually is.

One must also remember that the BoE's track record on setting the 'right' interest rate is woeful.

Ralph Musgrave said...

The pound fell by 25% in 2008. I didn't realize it had happened till 2009. Nothing changed for me. Doubtless those buying foreign cars and going on foreign holidays noticed, but I can think of more important categories of people to worry about: NHS patients, pensioners, etc.

Lola said...

RM. That fall didn't even affect the price of foreign cars - Audi's BM's etc. - either. Why? Competition. In any event the UK is a big international supplier of components, GKN drive line stuff for example, so bits that foreign car makers bought from us went down in price, i.e. cheaper for FCM to buy. It all evens out in the end.

Mike W said...

Ralph, re 2008

I got up one cold morning, checked exchange rate and couldn't figure out why my maths had gone. Checking FX every day for our business for a few years.

When I found that Brown had quitely devalued I ran over to my wife and hugged her and said, 'we are saved' and put our house on the market and sold over New year. We escaped a Scandanavian version of 'creative destruction' and came back to the UK. So it really saved us. Buying back into pounds against a strong currency that had not responded.
PS. you link to the critics of 'Debt the First 5000 Years' are pretty feeble. One main point: if you are going to demolish an anthropological and historical thesis; best attack it on those grounds first, don't yer think? Second, dont pick on the authors one, single, only reference of your pet German economist and make out the thesis rest on that, and third,dont say 'State theorists of money, dont 'get you knickers in a twist' and think that evades arguing the point, given that is where the author is so clearly coming from! Still if you think it is worth linking to a Cato funded site...I trust your judgement!!! :)

Mark Wadsworth said...

L, RM, thanks for your examples of "not much happened".

MW, I must admit, I moved back to the UK in 1993 with a suitcase full of Deutschmark, so that fall was a godsend to me, but domestically, nothing happened.

Random said...

Those exporting to the UK have the choice of saving the necessary Sterling (which stops the 'fall' in Sterling - not that there would be one), or cutting their prices in Sterling terms to maintain market share. Something they would have to do *or lose sales* because there is nowhere else in the world that can absorb the level of output the UK economy can.

Furthermore anybody suggesting an economic loss from Brexit is assuming that the government is powerless to counter any impact. When actually we would have the power to counter completely and the hog-tied governments remaining in the EU can't do anything.

Basically what Osborne is saying is he will crash the economy if we vote for Brexit:

"George Osborne has said the British government would lose £36bn in net tax receipts, equivalent to 8p on the basic rate of income tax or 7p on VAT, if the UK leaves the EU and negotiates a bilateral trade agreement with the bloc."

The whole thing is a total fabrication to introduce further austerity.

government investment => taxation + increase in private savings

Each time, every time for any positive set of tax rates.

How much the economy grows or shrinks is mostly down to the level of government spending undertaken by the government to support the businesses of the UK. Similarly the BoE and Osborne have full control over 'borrowing costs' and interest rates as the BoE can just buy any bond that falls below par and cancel it QE style.

The *only way you can 'lose' that much taxation is if you spend £36bn less on public services*.

And that is actually Osborne's intention.

Bayard said...

"the non-partisan National Institute for Economic and Social Research"

Ah, but how partisan is the person saying that it is non-partisan?

James Higham said...

The critical question is who's buying it?

Mark Wadsworth said...

B, perhaps he mean "non-partisan" in "closely affiliated with neither Labour nor Tory"? Which is meaningless in this context as they are all on the same Project Fear side.

JH, sadly, half the population don't have the time or energy to look into these outrageous claims and are going to vote to Bremain.

Bayard said...

M, good one. I hadn't thought that the non-partisanness of the think tank might be related to another subject entirely. I suppose we all have subjects about which we don't give a shit and so we can all describe ourselves as non-partisan, strictly speaking.