The Gnomes Lose Confidence

SATURDAY, NOVEMBER 15, 2008

The Gnomes Lose Confidence

I'll tell you what we think of sterling

Following the Traitor Osborne's unspeakable attempt to undermine the People's Pound, the state broadcaster has relayed this important announcement from the Supreme Leader:

"I regret the partisan talk from the opposition. At a time when nations are coming together all over the world to deal with these problems, I think people are looking to politicians to be responsible and to show leadership."

As always, patriotism is the last refuge of the beleaguered politico. In reality,George's supposed betrayal amounts to no more than stating the bleedin' obvious:

"Sterling has devalued rapidly against the euro and the dollar. We are in danger, if the Government is not careful, of having a proper sterling collapse, a run on the pound. The danger of a run on the pound . . . is that it pushes up long-term interest rates, which is a huge burden on the economy. The more you borrow as a government the more you have to sell that debt and the less attractive your currency seems.”

It's nothing we haven't said many times on BOM, and Tyler certainly yields to no man in his willingness to roll naked in the Union Jack. It is a strange patriotism that cannot speak a blindingly obvious truth.

The fact is that the currency markets have finally remembered what Labour governments always, always, always do to the value of sterling. They shaft it.

Attlee's Labour devalued by 30% in 1948 (the $4 pound became the $2.80 pound).

Wislon's Labour devalued by 14.3% in 1967 ($2.80 to $2.40). He claimed the Gnomes of Zurich forced him into it, but in reality it was his overspending and barmy economic policies.

Wislon/Callaghan's Labour presided over a c20% fall (against our trade-weighted basket) - including the Day the Pound Nearly Died in 1976.

And now, Blair/Brown's Labour has already delivered a 15% fall since 1997 (trade-weighted).

Which is why in just the last year, sterling is down 30% against the dollar, 20% against the Euro, and 20% against our trade weighted basket of currencies. International investors have voted with their electronic trading screens. They can see all too clearly that bungling Big Government Labour has put us in a much worse position to deal with the global financial crisis than virtually any other major economy.

No wonder Brown's New Bretton Woods posturing is getting such short shrift in the informed financial press (ie not the BBC). Yesterday, describing the"Washington confab of the Group of 20 world leaders" as "the most poorly timed in history", the Wall Street Journal let rip:

"...the meeting [is] a wonderful forum for other national leaders to grab the limelight of statesmanship, real or imagined. British Prime Minister Gordon Brown has been especially voluble, yesterday suggesting that the world should pass a coordinated fiscal stimulus. "By acting now we can stimulate growth in all our economies," said the PM, without offering many details. "There is a need for urgency."

In fact, the need is for sensible, reassuring policy, and a global government spending spree financed with higher taxes or more borrowing won't stimulate much of anything save perhaps Mr. Brown's approval ratings."

Ouch.

Which brings us round to those tax cuts again.

George is quite right to emphasise the risk that unfunded tax cuts might spook the markets. As we've noted, market confidence is already in short supply, and higher borrowing could easily trigger a classic sterling melt-down. If that happened, bond yields would ramp up in fright, we'd find our fiscal boost negated by evenweaker investment and consumer spending, and we'd be in even worse doo-doo than now.

So how can we get the tax cuts we need without sparking a market panic?

Yes, of course - cut spending. And in this week's Spectator Fraser Nelson gives us an excellent summary of how we could find literally billions by simply trimming Labour's spending fat.

But even we low tax zealots generally accept now isn't the best time to cut spending. Immediate tax cuts - yes, definitely. But immediate spending cuts? At the onset of a big global recession? No, not really (see this blog).

Which is why we're keener than ever on sticking with the fiscal rules. And beefing them up with the spending rule.

The only way we can hope to persuade the gnomes to lend us even more is by setting out a clearcut quantified programme for gripping our chronic spending habit. Let's start by announcing a specific target for cutting public spending within five years by 5 percentage points of GDP.

PS The real world of currency trading works like this: nobody gives a stuff what opposition politicians opine about the vulnerability or otherwise of currencies. What matters is the policies that governments pursue. To the extent that Osborne has any influence over the current value of sterling, it's because he will be the next Chancellor, and will be setting economic policy from 2010. And what he's telling the markets is that he's very worried about Labour's reckless spendthrift policies, and will likely be far more prudent on borrowing. The currency markets will like that, and if anything, they will be reassured. They will figure that the current bunch of prannocks may be replaced by someone who will restore a small measure of sanity. Of course, he'd have even more impact if he followed Tyler's advice on the fiscal rules.