Gideon, We Really Can’t Wait Until September For You To Respond
June 27, 2016
by Martin Odoni
I do understand that Chancellors of the Exchequer feel the need to exude calm confidence. However the inevitable slump of the pound in the aftermath of the Brexit vote has brought a response from the present incumbent at 11 Downing Street so relaxed you could almost pour him into his suit.
George ‘Gideon’ Osborne, for whom I have of course always had the deepest respect, except when I am asleep (oh yes – or when I am awake), said this morning, with no apparent trace of irony, that the UK is “in a position of strength”. While admitting the painfully obvious point that adjustments would need to be made to the British economy, post-withdrawal from the European Union, he then said, quite maddeningly, that it could wait until after David Cameron has been succeeded as Prime Minister. Osborne could hardly have sounded more like a British Muhammad Saeed al-Sahhaf as the allied tanks were rolling into Baghdad, if he had declared, “The infidels are committing suicide by the hundreds on the gates of the Treasury!”
Now, according to the 1922 Committee, the next leader may not be in place until as late as 2nd September, which means that Osborne is willing to do nothing at all for two months.
After another day of bad news on the stock exchange – including another very serious reduction to the UK’s credit rating – this seems comatose, not cool-headed. Now in fairness, he is not explicitly ruling out doing anything at all between now and then, merely not arranging the Austerity-heavy emergency budget that he was threatening people with, in his characteristically diplomatic fashion, before the referendum.
But even so, he also has had an air about him of doing nothing, not least given his prolonged absence from public post-referendum view until this morning. There is no doubt that the problems need some corrective action. I am not suggesting anything dramatic, nor am I suggesting that measures Osborne might use are guaranteed to put a stop to the slide in the value of sterling. Further, there is just a chance, though not a great one, that the problems are simply a rather prolonged blip and the markets will soon right themselves once the shock of the vote has worn off.
But it would be an awful lot better if we had a Chancellor who is not just going to count on that hope, instead of being proactive. So here are a couple of small boosters to the pound that Osborne could try, just to apply a bit of a ‘drag factor’ to its plummeting value.
- First, Osborne could ask the Bank of England for a small cut in interest rates. This would make loans for sterling cheaper, and therefore more attractive to potential borrowers. With rates currently at just 0.5%, there is not much room for further reductions, but even a very small cut could help. If enough loans are taken out in response, demand for the pound will have gone up, and may just stabilise its value somewhat.
- Secondly, Osborne could ask the Bank of England to do a sort of ‘negative-QE’ to siphon some electronic capital out of the system. This would make pounds scarcer, at least in electronic form, and there will therefore be less to go around. Therefore, theoretically, demand for pounds would be increased.
- And thirdly, Osborne could order the Treasury to buy up some capital from the markets at a high bidding rate, which pushes the price up, while again reducing the amount of pounds in the system.
(In terms of practical application, options two and three are very similar.)
I do not expect Osborne to try any of these, because none of them really involve giving money to bankers or taking money from poor people.