British House of Lords inquiry into the Bank of England’s performance is a confusing array of contrary notions
On November 27, 2023, the Economic Affairs Committee of the British House of Lords completed…
The UK Guardian continued its anti-Brexit bias in its article (January 4, 2019) – Brexit anxiety drags UK economy almost to standstill. Read the words which clearly mean – Brexit anxiety causes UK economy to stall. No nuance. No comparability. Just plain, unproven bias. Now, let’s be clear. The British economy has slowed considerably in the last quarter and the chaotic political behaviour among the British government is bound to be causing anxiety among voters. The British establishment is looking more comical lately than it usually does. But, as I have demonstrated previously, the trajectory of the British economy that is emerging pre-dates the Brexit referendum and has more to do with austerity biases in policy design and the state of private domestic balance sheets (accumulated debt positions) than it has to do with Brexit anxiety. Further, the data that the Guardian reports (the latest PMI results) also suggest that the Eurozone and Germany, in particular, are also recording similar declines in sentiment and activity. It is hard to blame Brexit on that.
My blog posts on Brexit from 2016 and beyond include:
1. Britain should exit the European Union (June 22, 2016).
2. Why the Leave victory is a great outcome (June 27, 2016).
4. Mayday! Mayday! The skies were meant to fall in … what happened? (August 24, 2016).
5. Austerity is the problem for Britain not Brexit (January 9, 2017).
6. The Left lacks courage and is riddled with inferiority complexes (January 11, 2017).
7. Why Britain should not worry about Brexit-motivated bank relocations (May 16, 2017).
8. Britain’s labour market showing no Brexit anxiety yet (May 30, 2017).
9. Britain doesn’t appear to be collapsing as a result of Brexit (December 13, 2017).
10. British Labour remainers – the reality seekers bogged down in myth (January 31, 2018).
11. The facts suggest Britain is not as reliant on EU as the Remain camp claim (April 16, 2018).
12. The Europhile Left use Jacobin response to strengthen our Brexit case (May 22, 2018).
13. The ‘if it is bad it must be Brexit’ deception in Britain (May 31, 2018).
14. How to distort the Brexit debate – exclude significant factors! (June 25, 2018).
15. Brexit doom predictions – the Y2K of today (August 26, 2018).
16. More Brexit nonsense from the pro-European dreamers (December 27, 2018).
17. British data confirms strong FDI continues despite Brexit chaos (December 12, 2018).
18. The Brexit scapegoat (January 7, 2019).
The UK Guardian article basically reports on the latest – IHS/CIPs Markit Services PMI Index (IHS Markit and the Chartered Institute of Procurement and Supply Services Purchasing Managers’ Index), which was released on January 4, 2019.
Sure enough, the key findings are:
Modest rises in business activity and new work
Job creation eases to 29-month low
Business confidence at second-lowest level since 2009
We read that:
1. “business activity rising at one of the slowest rates seen over the past two-and-a-half years”.
2. “a slowdown in job creation to its weakest since July 2016.”
3. “Reports from survey respondents suggested that Brexit-related concerns were a key factor weighing on business-to-business spending at the end of 2018.”
4. “A number of firms also noted that subdued consumer demand had acted as a brake on sales in December.”
5. “Another relatively weak rise in business and consumer spending contributed to a lack of new work to replace completed projects in December.”
Related statements from the partners who produce the survey all noted something to do with Brexit anxiety, which is where the UK Guardian takes its leave from.
The UK Guardian article essentially paraphrases the press release from IHS/CIPS.
It also mentions the latest Bank of England data, but fails to draw any of the insights from that data, because it is intent on sheeting home all the blame for Britain’s slowing expenditure onto Brexit.
But if one examines the broader data, it becomes clear that Brexit is probably not a driving factor in the current malaise.
On January 4, 2019, the Bank of England released its latest – Money and Credit – November 2018 – data, which shows movements in borrowing and deposits by UK households and business firms.
The data shows that:
1. “The extra amount consumers have borrowed each month to buy goods and services has slowed in the second half of 2018.”
2. “Mortgage market activity has been broadly stable since 2016”.
3. “Borrowing from banks remained robust” for businesses.
An earlier Bank publication (September 16, 2014) – Household debt and spending – makes it clear that there is the “potential for household indebtedness to lead to large adverse impacts on aggregate demand” despite the fact that in “standard economic theory … Debt plays no causal role in determining the amount of spending”.
Thus acknowledging the lack of attention by mainstream macroeconomic theory to financial stocks and flows which is built on a “number of simplifying assumptions” which when relaxed allow for “a more active role for debt in explaining spending patterns”.
In mainstream economic theory, the simplifying assumptions include:
… households are assumed to be able to borrow as much as they choose; the cost of borrowing is held constant; households can accurately predict their lifetime income; and more generally, these models assume that there is no uncertainty around the future path of economic variables.
The reality is very different – “households are not certain about their future income and they do face (time-varying) constraints on their ability to borrow”.
The Bank research suggests that “UK households with high levels of mortgage debt made larger adjustments in spending after 2007”, and the general global research results suggest similar outcomes.
On July 26, 2018, the British Office of National Statistics released a report – Making ends meet: are households living beyond their means? – which showed that:
UK households have seen their outgoings surpass their income for the first time in nearly 30 years … To fund this shortfall, households either have to borrow – at which point they could be living beyond their means – or dip into their savings.
And our data show they are borrowing more and saving less …
In total, households accumulated more debt (due mainly to loans) than assets (such as deposits, bonds, shares and pensions) in 2017 for the first time since records began in 1987. If this were to continue, households could risk lacking enough collateral to cover their debts.
A related ONS publication (October 8, 2018) – Alternative measures of UK households’ income and saving: April to June 2018 – showed that:
1. “real household disposable income (RHDI) … has remained relatively flat since the second half of 2015.”
2. “In 2017, cash-basis RHDI fell by 0.6%; this was the second successive year of decline”.
3. “The cash-basis saving ratio was negative 0.6% in the latest quarter; compared with negative 0.8% in the previous quarter.”
4. “This was the third successive quarter in which the cash-basis saving ratio has been negative, meaning that households’ spending exceeded their gross disposable income, on a cash basis, in Quarter 2”.
Further, on June 5, 2018, the ONS released this report – An expenditure-based approach to poverty in the UK: financial year ending 2017.
It showed that:
1. “In the financial year ending (FYE) 2017, of the UK population 22.8% was considered to be in income poverty and 21.8% was deemed to be in expenditure poverty.”
2. Morever, in 2013/14, the proportion of British households enduring expenditure poverty was 19.64 per cent and this has risen to 21.85 per cent by 2016/17.
3. Income poverty rates also rose in the period 2015/16 to 2016/17.
More recently, ONS released the latest – Quarterly sector accounts, UK: July to September 2018 (December 21, 2018) – which showed that:
1. “In Quarter 3 (July to Sept) 2018, real household disposable income showed no growth”.
2. “In Quarter 3 (July to Sept) 2018, the households saving ratio fell to its joint third lowest on record to 3.8%, down from 4.1% in the previous quarter; while the 2017 saving ratio has been revised from 4.1% to 3.9%”.
3. “Non-financial corporations have seen their financial debt levels remain at near records high in the last few quarters …”
These are longer-term trends for an economy that has been subjected to substantial and sustained fiscal contraction and running a continuous external deficit.
Under those circumstances, the only way any growth could have occurred in the economy was via increased private domestic sector deficits, which is what the data over a long period of time has been telling us is that has happened.
Sustaining growth through ever-increasing private domestic debt is not a sustainable process and eventually the balance sheets of the private domestic sector borrowers become so precarious that they put the brakes on and that means spending growth slows.
At present, Britain is producing the pre-conditions for another balance sheet recession and that will occur if the British government continues to undermine growth with its contractionary fiscal policy.
Further, the problem of the PMI Surveys is that the evidence generated is not hard fact but largely ‘sentiment’.
We have a scapegoat – Brexit – blame it for everything when you do not want to actually list the real causal factors.
For example, there was no mention that the ongoing fiscal austerity which has ramped up in the last several months has anything to do with the flat domestic demand, which drives growth.
There was no mention of the low wages growth that has put a brake on household consumption expenditure at a time when household debt has been rising to dangerous levels.
And there was no mention of the what is happening elsewhere to get some sort of comparator.
And if we look at what the PMI results for other nations is we get a very interesting and broader insight.
Take the – IHS Markit Eurozone Composite PMI (released January 4, 2019).
1. “the index was at its weakest level for over four years.”
2. “The slowdown in growth during December in part reflected lower activity in France” – the scapegoat there is the “gilets jaunes’ movement”.
3. But, “growth tended to weaken elsewhere, led by Germany which registered its weakest outturn for five-and-a-half years.”
4. “IHS Markit Eurozone PMI® Services Business Activity Index declined for a third successive month during December to hit its lowest level in over four years”.
Get the picture?
Drilling down for Eurozone leader using the – IHS MARKIT GERMANY SERVICES PMI (released January 4, 2019) – we read:
1. “Business activity growth in Germany’s service sector slowed to the weakest in over two years in December … a further sign of the eurozone’s largest economy losing momentum”.
And more generally, the – J.P.Morgan Global Services PMI (released January 4, 2019) – noted that:
1. “The upturn in the global service sector slowed in December, following the weakest expansion of new order intakes in over two years.”
2. “The average index reading in the fourth quarter (53.4) was the weakest since quarter four of 2016.”
And so it goes.
The task for those who want to sheet home all the current British problems to Brexit anxiety is to explain why there are similar trends in many nations across the globe and why much of the current global slowdown is explainable using sensible economic logic by trends that have been established well before the Brexit vote (austerity bias, record levels of private debt, slowing housing markets etc).
Scapegoats also tend to be nationally specific to serve the interests of the dominant political economic ideology.
Brexit in the UK, Gilets jaunes in France, Trump trade war elsewhere.
All these scapegoats serve political and ideological purposes and obscure the global trends.
And why might the US be outperforming the other nations at present despite the ‘Trump trade war’?
Well it might be something to do with his fiscal stimulus which is running counter to the global trend in fiscal policy.
I wouldn’t deny for a second that the uncertainty arising from the political incompetence being displayed by the May Government and the divisions now revealing themselves in Labour over Brexit are causing anxiety in Britain.
But I have been tracking all these trends for years and the problems facing Britain pre-date the Brexit period.
The common ground is that both the Brexit debacle and the underlying problems with the British economy can be understood in terms of the ideological bias that the British government has towards austerity and its incompetence as a policy maker.
The same might also be said about the France economy slowdown-Gilets dilemma. They are driven by a common cause – the incompetence of Emmanuel Macron and the austerity bias of the Eurozone.
Richard Thomson from an English cross-border corporate restructuring firm sent me an interesting article that he had written about Brexit, which points to how pathetic the strategies deployed by the British government are at present and the sort of surrender mentality that the Left has adopted in to this question.
He applies the “Golden Rules of Restructuring” to the Brexit question because he believes the “similarities between Brexit and complex cross-border financial restructurings are extensive”.
The important point is that the conclusion is that the “rules are counter-intuitive vs usual business (or political) practice”.
And they dovetail closely with the sort of arguments I have been making since this debate began and which Thomas Fazi and I lay out in our recent book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, 2017)
Richard Thomson’s article (December 19, 2018) – The Case for Hard Brexit – a Restructuring Specialist’s Perspective – demonstrates why the British government’s Brexit approach and the view of the Europhile Left in Britain is bound to deliver poor outcomes.
He lists the “golden rules of corporate financial restructuring” and applies them to the Brexit imbroglio.
Rule 1: “Develop your unilateral path (ie a restructuring that is not reliant on consent from the opponents)” – the fact that the British government has been going cap-in-hand to the European Commission over the ‘agreement’ violates this rule.
Rule 2: “Be the “deal-setter” for consensual discussions (never be a deal-taker)” – which amounts to leading with “your proposal” and giving “your opponents … a simple choice between this and a worse deal for themselves”.
Rule 3: “Define options to avoid it becoming a negotiation” – make the options clear from the start.
Rule 4: “Management are Golden” – the government is in charge of this and will oversee the results. The pressure must be on to push the Government into accepting that in the adjustment period, fiscal policy will have to stimulate growth and see the economy through the changes.
Rule 5: “Move at the speed required to hit the earliest restructuring date” – delays etc only increase the costs.
And he lists a “Bonus Rule”, specifically in relation to the Brexit issue – “consistent success comes from focussing on Process not Outcome, and whilst actively avoiding Provocation”.
He applies these rules that he uses in cross-border corporate restructurings to the Brexit issue.
You can read the detail directly from his article.
But the logic is clear – if we “flip” the “who needs who” concept (currently the debate is dominated by the claim that Britain needs the EU – particularly among the Europhile Left that is killing off Labour’s prospects) – then we redefine Britain as “master of their own destiny” with all the power it needs within its own legislative remit to present the EU with a take it or leave it deal.
Why would Europe be interested?
Well, for an important start, “the key decision makers (Ge, Fr) are producer economies” while the UK is “more a services economy” and “more globally aligned”.
In other words:
Flipping the fear back on your opponent is a key part of the art of restructuring.
Brexit is turning into chaos because the British government and the Left have adopted the view that Britain should be subjugated to the EU – to the corporatist, neoliberal, unelected European Commission.
Reversing that idea of ‘dependency’ would change the game dramatically.
What about the Bonus Rule?
Richard Thomson says that this is to overcome the current impasse where Britain must re-establish the “process with the UK as lead”.
The case for developing hard Brexit is clear: it is a tool to ensure the development of high-quality options, so that the best route can be taken.
The EU has clearly been an “obstructive opponent” in the negotiations.
This is because the British government has been a supplicant.
And as his article closes, the analogy with corporate financial restructurings ends, with the acknowledgement that “there is no equivalent to the UK going into liquidation”.
He writes that:
The UK is fully capable of thriving on the world stage whatever the outcome. Unlike Greece, the UK is not a “deal taker”… I just hope that our politicians wake up one day and realise this.
And this is what the British Labour Party leadership should be hammering home every day.
Hiding behind fake fiscal rules to appear reasonable and capable and trying to walk a tightrope between the Blairites, the Europhile Left and those who desire to reestablish full sovereignty for Britain is bound to fail.
Jeremy Corbyn and John McDonnell should be out there telling the British people that Britain’s legislative capacity once freed from EU constraints and its fiscal capacity will always be sufficient to prevent recession and improve domestic living conditions.
Brexit will force sectors to adapt and things will change a bit.
But a no-deal Brexit is no catastrophe if the British government realises its own capacity and abandons the neoliberal bias and inferiority complex with respect to Europe.
I am working on a new theme at present. I increased the font size 1 point today to see what it looks like although my new design which is slowly evolving when I get a little time will be quite different to the current format.
That is enough for today!
(c) Copyright 2019 William Mitchell. All Rights Reserved.