We have no idea why we are having a General Election just now. Not the foggiest idea how we remove the keystone of free trade and yet the edifice of beneficent competition remains intact. We have not much idea how you have free capital flows without free trade, or how floating exchange rates then work.

But we are all about to find out, apparently.

Meanwhile, we did enjoy Andrew Bailey’s valedictory talk, at least under this decade of Tory rule, to the LSE. It made clear the Bank’s view on its own Reserves and fired a shot across Rachel Reeves’ bow in the process.

 

ELECTION TIMING: WHY NOW?

We could speculate on Rishi’s slicing through the Gordian Knot, and admire his nerve in doing so; but it is just speculation. We do know a General Election costs about £20 million per political party (yes, only that much in the UK). This will have required many earnest meetings and interminable slide decks. So, it must have looked like a good idea, at least to someone.

It leaves some largely superficial legislation half completed, and hastens the retirement of hundreds of Tory MPs, voluntary or otherwise. Even Gove has gone. A whole new cast will take the stage. Starmer then has eight weeks of summer bedding-in, before the treadmill grinds into action for him too.

A new cast won’t change the script, however. They should be just as careful of sinking beneath ill-judged promises; delivery is all, and the toolbox is empty. Whilst coups and factions could be just as ridiculous.

 

A DIVIDED SMALLER GLOBAL ECONOMY

 

Free trade and the wealth of nations is much more interesting. In the last five years COVID has allowed the erection of unthinkable trade barriers.  Meanwhile, an imperial power wary of spilling the precious blood of just one nation, has over indulged in the funding of extraordinary slaughter, in too many others.

We seem to have lost our view of one humanity seeking development and freedom from poverty, for a globe divided into blocks, quite familiar to Biden’s distant youth, but strange to us. Naked protectionism rules, now trumping even the climate emergency.

Sanctions pile upon sanctions, 16,000 against Russia alone. Yet all of the above is now normal. There are no rounds of trade talks. The WTO withers, for lack of an appeals panel. Neither Trump nor Biden helped by their blocking of appointments.

 

THE SUPPORTS LOOK ROTTEN TOO

 

But what else is supported by free trade? Well for a start free trade is the international version of competition. Competition has no inherent virtue; it is, like free trade, quite destructive of businesses, seeking the lowest price. So, it too is junk, only valid within the four walls of a protectionist jail, which is hardly valid at all.

So, once we accept globalization is irrelevant, out goes competition, or rather it becomes a political tool, and as such has no economic validity.

In this context, consider the issue of floating currencies; if we junk that, then out goes the free movement of capital as well.

Look at how China devalues the Yuan to offset tariffs. Or how Japan’s state policy is now devaluation.

We must expect some pretty hefty steps to shut out American access to markets or to act against floating currencies, coming down the track, if someone does not stop the madness. Nationalism will get ever harder to contain, once we don’t trade with each other. And superpower battles will lead to ever more defaults and destitution for the poorer countries. Look at Yemen, Venezuela, Myanmar, Somalia, Sudan, Afghanistan. Proxy wars are being fought in odd places; they are still people, and these are still wars.

Cut out free trade, and you cut out the economic heart of the globe.

 

NOT BANKING ON IT

 

Still taken from this Video of Andrew Bailey’s talk.

The graphs speak volumes – do look.

I didn’t know this was Bailey’s last gig before the election, but maybe he did. He made a densely argued case for being very careful about political tinkering with Central Bank Reserves.

As he tells it, we went from post war banks dedicated to commerce and trade in the 1950’s and 60’s. Then came the great liberalization of consumer finance, in the 1970’s and 1980’s, followed by a perilous patch of virtually no reserves, through much of Tony Blair’s time, quite visible for an extended period before the crash (the slim orange block below). However cleverly he called it global, it started in domestic errors.

Then the sudden explosion of reserves under Quantitative Easing, followed by the virtual end of commercial and business lending. The term funding scheme was an attempt to rectify a surge in consumer lending, but is now itself winding down.

So, to now when our system rests on vast bloated mortgage books and tons of gilts in the vaults. It still looks a very long way down to ‘normal’.

There were a couple of well-placed questions at the LSE, strongly hinting that the next Government will try to exploit those bank reserves (perhaps by stopping interest payments on commercial bank funds held at the Bank). Bailey was making the case for not reducing the balance sheet much below £400 billion, back to the 2016 level, that yellow shoulder on the graph.

 

That in itself is a sign that the banking system is not really working; as he ruefully noted, the recent crises (Silicon Valley Bank et al) came from not too little money in reserve, but too much in too few places.

And stock markets? Well childishly they seem pretty chill about it all. If money is being trashed, don’t hold money they say.

Well, do watch that ten-year gilt: for six months it has trended up.

What does that tell you? Not a sign of rate cuts soon. Almost back to the Truss spike, which apparently, we could not live with.

Like a few other things of late, it all looks fine, until it isn’t.

While the UK index is up overall, the indebted part is flat to falling, and there is plenty of that in the ‘value’ area.