Finance experts debunk Jacob Rees-Moggs economics in select committee

Jacob Rees-Mogg’s claims about the government’s self-inflicted economic meltdown are debunked by experts at the Treasury select committee.

Re-smog this morning on the tv in a round of interviews denied that the problems in the markets were caused by the many budget if we want to call it that the fiscal event whatever it was and basically said that it was differentials between the pound and the dollar and what’s going on in america rather than the fiscal announcements that were made here is he right

And i didn’t have the pleasure of seeing the business sector this morning and so i don’t i want to comment on exactly what he said but in terms of what we should focus on i think i would listen more to the um uh bank of english chief economist who said to you very clearly that there was a clear uk component of what was happening yes john conleeff in his letter with

Very helpful i meant you i meant hugh bill um the chief economist but the deputy governor also spelled it out in his letter to um the chair very clearly i don’t think anybody who’s spending that time and unfortunately too many people are spending their time looking at uk guild markers right now things that there is only an international global element to what is

Going on i mean they’re just really basic things like uh uk guilds were um had a lower yield than u.s treasuries until the recent past and now they have a higher yield there’s lots of things if you look at the spread versus um german buttons it’s up significantly so just look at the change over the last year look at the change particularly since september on the

Costs of um the yields on uk government debt it’s very clear that there’s a uk specific element to what’s going on that’s what the banker building is telling you i focus on what they’re saying does everyone agree that there are uk specific elements to what’s going on in the international markets as a result of the mini budget or the fiscal event or whatever women

Call it everybody’s nowaday sandra if i may um just i i haven’t had the pleasure of seeing or hearing the business secretary’s comments but i think there are two components that need to be understood with this and there’s absolutely a uk component here and one cannot disentangle that but there’s also a global component that also should be seen in the grand scheme

Of things and you know when we look at markets and when we look at investor reaction you know what we’re seeing are two two pieces of a puzzle that’s sort of building itself together and from a from a global perspective we see market sentiment stretched stressed there’s increased volatility and there are a couple of reasons for that one is the global geopolitical

Tensions you know in large part what we’re seeing is russia’s invasion of ukraine and that’s created a lot of volatility in the energy market specifically as we know there are other markets as well that has been affected particularly the food market and that’s increased risk version in the markets that’s increased volatility in in the market as well and the second

Thing that we can’t avoid talking about is high inflation so central banks across the world particularly in developed markets are now fighting extraordinary inflation what we’re seeing now is an extraordinary synchronized global tightening cycle which is creating a lot more uncertainty a lot more volatility so yes there’s absolutely a global component that can’t be

Abstracted from what we’re seeing and that has resulted a sort of mentioned wheels going up everywhere but in the main there’s also an idiosyncratic uk specific component and that has to do with what the governor of the bank of england’s been talking about for months for quarters and that’s really coming down to the terms of trade shock that the uk uniquely faces

If you look at the trade balance in the uk we’re seeing some of the worst brexit as well and not being able to get things over the border the northern ireland protocol it’s inclusive inclusive of all of that so if you look at the trade balance and if you look at where the trade balance is it’s at a historic deficit we haven’t seen this kind of trade deficit 1955

Since national account records began and when you throw onto that you know the current external financing needs that are extraordinary you know with the time going into september 23rd the chancellor’s mini budget the ons was talking about an 8.3 current account deficit that’s an extraordinary current account deficit if you look across developed markets and emerging

Market economies the the narrow basic balance that the uk has is extraordinary it’s one of the worst most developed and emerging market economies so the external financing needs of the uk are are certainly a big function of what we’re seeing and then you throw on the september 23rd event you’ve got a sideline fiscal watchdog you’ve got a lack of a medium-term

Fiscal plan you know one of the largest unfunded tax cuts that we’ve seen package measures that we’ve seen since the early 1970s and it’s sort of the straw that kind of broke cameras back if you if you will so not only has the uk’s external financing needs increased significantly because of a lot of the fiscal measures that we’ve seen it’s put a lot more pressure

For markets and the one thing that i just want to maybe bring it back to is that given the global factors that we’re looking at given the idiosyncratic local factors that we’re looking at what we’re seeing is increased market uncertainty increased market volatility and increased market illiquidity and the reason why that’s important is because small moves small

Surprises that we see in the market tend to have bigger impacts and so when we put this into context of what we saw on friday september 23rd you know the small surprises that we had the small moves yes in the grand scheme of things that may not have been much largely lots of these were leaked to lots of the tax cuts that the chancellor was planning were leaked

In the government uh almost a month ago but when it when we did see the big issuance projections increase from the dmo 60 billion pound upgrade the markets reacted we saw was a textbook response where investors were saying yes we need a cheaper currency to fund the current account deficit and we need higher real yields higher interest rates so absolutely i think

I completely agree there is a uk specific component but i think we shouldn’t abstract away from the fact that there is also a global component too but perhaps what you’re explaining is that in those kinds of febrile and uncertain conditions launching a sudden lurch of an experiment trashing the local structures around which the bank of england the obr have

Traditionally worked might not have been the cleverest thing to do i think markets are very sensitive to what’s happening at the moment and what we’re seeing now from the government there’s a fiscal policy and monetary policy are moving in opposite directions and what markets don’t like especially especially in this period of heightened uncertainty heightened

Volatility and very little liquidity in both the currency market and the rates market is that inconsistency i think they’re worried by that and i think because being sidelined tom scholar was sacked um and and there were noises during the conservative leadership election which threatened the bank of england’s independence and its mandate do you think that anyone

That that also has spooked the market there was then the presence of the chancellor following the physical uh the uh the fiscal event on the sunday news programs where he hinted that there would be more touch coats yeah when we discussed this a bit on the session on the 28th maybe it was just a day before the fiscal uh the mini budget that we’re now calling it the

Um i mean it’s yeah i think i think it’s wrong actually to think about it slightly as well this is international components and then there’s this uk specific component it’s the you shouldn’t be doing the uk specific component exactly because of the wider environment which is exactly what we discussed the day before the statement and exactly what we discussed is

What has transpired except it’s worse both in terms of the risk that was taken and the outcomes that have followed so i don’t think anyone should be surprised by what would happen i think we’re in this exact room discussing it i think exactly this kind of policy isn’t a joke it would have been even more angry if you’d have realized yeah absolutely and the bigger

Picture was obviously um that and i wouldn’t you know the big picture is yes firing treasury civil servants isn’t a good idea that hasn’t helped side letting your um physical watchdog hasn’t helped but the big picture which is if you spend a summer telling people that you’re intending to abandon physical orthodoxy if you then announce a package that announces

That dumps fiscal orthodoxy and then you say on the sunday you’re going to keep doing it then i don’t think any of this should be a surprise to any is that this is where you end up and this is what happens if you aren’t paying attention and you know maybe you could have got away with that in more benign times it would have been a good idea at many times but you

Definitely shouldn’t be doing it in the current climate when we’re moving to a higher rates regime across the advanced economies that brings with a whole world of problems that we’re going to be resting with and the chancellor and the business secretary sounds like a right right way to say that everyone is going to struggle with that to some degree that’s going to

Put public finances debt costs around the world will rise it’s going to be hard for macroeconomic policy makers in general because you’re going to get this tension between fiscal and monetary policy as part of that mix and you’re going to have a big asset price changes in the mix and so this is always going to be hard but it’s exactly because it was always going

To be hard that you don’t do this yeah yeah we now have a situation where last night the governor of the bank of england made it very clear that the the market operations that they launched in in the aftermath of the the budget uh would last until the 14th he then said that’s it get it sorted by then to all the pension funds now this morning we’re hearing um

Whispers that actually it isn’t it um are there any comments about what on earth is going on there and what effect that’s likely to have in the markets it’s a wonderful i’d like to come here but i’d love gemma to come in in a minute on the politics of what’s going on but perhaps i could just briefly come in on this point and turn to you um clearly the fire sale

In the guilt market the conventional built market after the mini budget was a great concern the vacuuming is the right thing at that time to step in as market maker of last resort which has been lots of misguided comment describing this as qe it wasn’t qe it’s a temporary purchase of bonds as this committee knows but it’s worth just saying it in public again

Even last night i was trying to explain this to someone on some media program who didn’t understand it these interventions will be will be drained and won’t add permanently to the money stock in any way whatsoever they’re entirely the right thing to do when guilts had to be sold in order to meet collateral margin calls that were going on in this pension market

Because if that hadn’t have happened what would have happened it’s a sort of doom loop in the in in the guilt market where where things would have been sold off for even less of their value exactly real value both in the nominal and the index link market we had a move in the next link market on monday doubled real interest rates it’s priced in that market from

60 basis points to about 120 basis points there’s not been a movement of that magnitude for over 30 years these are enormous changes as you suggest driven by a shortage of liquidity in that market so the bank of england had extended these purchases that are due to end this friday to include for the first time the index link bond market and as you rightly say the

Doubling of interest rates both in the index link bond market and the conventional bond market was a great concern because you’ve then got prices that are suggesting market dysfunctionality and ultimately a threat to financial stability so intervening the market was the right thing to do your question then was about what happens next there was a concern earlier

This week that we were coming to a cliff edge on friday where the interventions were not uh continue so the bank of england earlier this week adopted a repo facility as you know where the people who need cash urgently now that now know they can sell their assets to their bank and their banks can borrow that money as much as they require from the bank of england

In order to keep the liquidity going in that market that new facility will extend until the 11th of november so it’s going to extend beyond our planned fiscal statement on the 31st of october and beyond the next npc decision of the 3rd of november and the hope is that that will allow the market to work its way through and allow liquidity to get back to the levels

It has to in order to allow that market to function whether that’s enough we’ll have to wait and see but right now it does seem a sensible course and i think if i just make one point that and i think both of toast and the sanjay have summarizes very well the real danger that we saw on the 23rd of september was obviously on the back of i think everybody describes

As guerrilla tactics against our independent economic institutions over the summer the treasury the bank of england and the obr and and therefore it wasn’t only the intervention on that date of guerrilla tactics by the government well i i will leave you to finish that statement but that undermined you know it’s a sense in which there was an undermining of the

Cooperative arrangement we had between the monetary and financial institutions that theoretically and in practice have led to lower interest rates and lower deficits than would otherwise had to be the case if you move away from that what you’re going to have is a succession of higher interest rates and higher deficits than you’d otherwise have and it’s precisely

That projection that the markets were taking are in the aftermath of the mini budget on the 23rd of september that if the government continued on this path there would be higher deficits than otherwise and higher interest rates not only as a result of the mini budget but as a result of successive statements into the future and i think it’s therefore very important

That there is a commitment now from the government so that any fiscal event that requires tax changes will always be accompanied by an obr forecast there’s not a world in which that shouldn’t happen anymore with appropriate signaling of policy alternatives as well that’s something we must think about as a result of what’s happened and it matters because lots of

People have come to me concerned about where their mortgages will go whether they can pay their bills almost directly as a result of of of the mishandling of this mini budget in the last two weeks it it’s not the way policy should be should be run it’s thank you very much now um dr teckler you were wanting to say something um uh briefly but would you also um think

About how this terrible mess could be sensibly unwound i mean my viewers probably abandoned the tax cuts but anyway you might want to make an observation um yes just briefly to follow up on judgment’s points there about the the extent to which part of the reaction and the problems have come not just from those specific announcements that were made but by undermining

And questioning um the institutions that normally surround our fiscal and monetary policy making and i would agree that it does seem that part of the problem has stemmed from that sort of questioning their credibility and not asking for a forecast from the obr i would agree with jackets that in we were we ought to get forecasts alongside major tax changes the only

Nuance i would add to that is that um i think that is less necessary if you’re doing temporary emergency interventions and so there may have been a case this time i think there was a case this time for perhaps having announced an emergency energy support package time limited doesn’t affect the longer term fiscal sustainability of the uk public finances which

Perhaps you could have done well may not have been long term symbol of public funds you could have done without a full obr forecast i think the problem this time was announcing permanent changes to the tax system which didn’t need to be announced so quickly most of them aren’t coming in until april so there was time to wait to get the fully obr forecast before

Announcing those policies and the fact they were rushed through so quickly it it’s unlikely that that provided time for the new chancellor to get a full briefing from treasury officials on the potential impact of those changes and to think about them and to interact with the obr about their longer term impacts and it was those factors together contributed i think

To the concern that there was about this government’s approach to public finances what a mess

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Finance experts debunk Jacob Rees-Mogg's economics in select committee By PoliticsJOE