Until we see what the Chancellor Jeremy Hunt has to say in his Autumn Statement next Thursday, there is little point in pontificating about the mess we are in, save to say it is of our own making, not Putin’s or the Chinese or whatever.
But what I would like to do now is to set out the way our financial structure should be organised in ten simple rules. Informed readers will spot a number of significant variations to the current dysfunctional chaos. Those for whom these things are really confusing might, I hope, find a simple foundation upon which to build future understanding. Professional economists will find their eyes popping.
1 Central Banks are banks, not Treasuries, and should never in future set interest rates or print money. Their stewardship of these responsibilities has been a disaster leading to gross fixed asset inflation, excessive borrowing, floods of money so cheap as to be almost free and nil return on savings. The combination has led to general inflation out of control and terror in the Bank of England, charged with keeping inflation low, that to do so will bust the economy. So it has done too little to late.
2 The democratically elected government must be responsible for the money supply, credit rules and interest rates, because these are political decisions, which must be taken in the interests of the wider economy and the social priorities of the majority as represented in parliament.
3 Markets must serve the people rather than the people be subservient to markets.
4 Governments must never, ever, borrow to meet day to day expenditure. They can either cut spending or increase taxes. They can also either increase the money supply to boost economic activity, or, if the economy is overheating, reduce the money supply and raise interest rates.
5 Interest rates must always, this is a golden rule, provide a meaningful return to savers. The average must not be lower than 5%
6 Money is a measure, not a thing and it must measure economic activity, not itself. It is the property of the State (hence the King’s head) and only the state’s treasury can print it. When it does it enters the economy as new money. No loans or gilts are involved.
7 Gilt Edged securities are not a credit card to be used by governments to live beyond their means, conning voters that prosperity is their offer. Neither should they be used as an aspiration to invest in this and that project, many of which never actually come to fruition. Cancelling things to save money already borrowed, without giving it back, is a modern political option, which in civil life would be classed as fraud.
8 Gilt Edged securities are a necessary instrument for investors, both domestic and foreign, who seek absolute bedrock security without risk. Depending on their coupon (interest rate) their trading value fluctuates between issue and redemption, but if held for the term, are absolutely guaranteed. Pension funds are obvious customers. The more the economic activity the greater the demand, including from overseas investors. The government can issue gilts on a continuous basis, not to spend, but to invest in its own reserves of either gold or foreign exchange. Thus the more the economy grows the more the State’s reserves expand.
9 Infrastructure investment can be funded with borrowed money but it must be with annotated bonds, which redeem not more than five years after the completion of the project. The coupon should, as with all gilts, be fixed not variable.
10 Index linked gilts are fine until the index takes off, as it has now. They can then become a real problem for the government. It is for investors to organise portfolios hedged against inflation. The government’s job is to prevent inflation getting out of hand.