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CARNEY'S ARMY
By John Newsome on 8th May 2013


It's interesting how the appointment of a new broom can lead individuals to, well, change their minds. I suppose psychologists would say it is somehow related to the ingrained desire to seek shelter with the crowd. From the dawn of human existence on the plains of the Serengeti, mankind's survival instinct decreed that the odds were better, together. Whether it was other tribes or the risk of getting acquainted with a variety of creatures capable of biting you in two (lions, rhinos, Luis Suarez etc), safety in numbers was the way to go.


There certainly appears to be a shift in thinking at the Bank of England (B of E) since it was announced that current Bank of Canada governor, Mark Carney, would be taking the reins from Sir Mervyn King in July. While the funny money from Quantitative Easing (QE) has been flowing for some time, the current governor never gave the impression that his heart was truly in it and in recent months, appeared even more reticent about QE extension. As such, it was a little surprising when Sir Mervyn and two other members of the Monetary Policy Committee (MPC) recently voted for another round of asset purchases.


Furthermore, barely a week later, in the course of giving evidence to the Treasury Select Committee, deputy governor, Paul Tucker, raised the prospect of penalising banks for depositing funds at the B of E. In essence, commercial banks could be charged (via a negative interest rate) on a portion of their reserves in a crude attempt to pressurise them to lend. He went on to describe this as a "radical idea ...... this would be an extraordinary thing to do and it needs to be thought out very carefully". Not really, the idea is so barking mad, a couple of nanoseconds should suffice. He went on to stress no action was imminent and it "was not something that anyone should clutch on to as the answer to the universe". It most certainly isn't although Mr Tucker's idea possibly originated there; not Venus or Mars but more likely, Uranus.


But, if it's radical and not imminent then why mention it at all? It smacks of feeling the need to come up with ideas in order to placate grandstanding MPs. In addition, would it have ever been mentioned if Mr Carney was not on his way, armed with his new toolkit targeting nominal GDP growth and a more flexible interpretation of the inflation mandate?


To be fair to the MPC, they're pretty much out of ammunition because we already have record low interest rates, £375bn of freshly printed money, a weak currency and a still yawning annual budget deficit. Politicians may try to convince the electorate otherwise but long term prosperity will never be delivered via a combination of negative real interest rates and the printing press. It's not often you get clarity from the heart of the EU but Luxembourg's Prime Minister, Jean-Claude Juncker, summed it up nicely. "We all know what to do, we just don't know how to get re-elected after we've done it".


John Newsome can be contacted on:
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