WEBVTT - Kopi Time E086 - OMFIF’s David Marsh on the Sterling crisis and UK 0:00:06.160 --> 0:00:09.270 Welcome to Covid Time, a podcast series on markets and 0:00:09.270 --> 0:00:13.940 economies from DBS group research. Chief economist. Welcome to our 0:00:13.950 --> 0:00:19.160 86 episode. Today's guest is David. Marsh. David. Co founded 0:00:19.160 --> 0:00:23.090 in 2009 official monetary and financial institutions forum. Better known 0:00:23.090 --> 0:00:26.500 for its acronym AMF if it's an independent think tank 0:00:26.500 --> 0:00:30.870 for central banking, economic Policy and public investment. Since 2018, 0:00:30.880 --> 0:00:33.000 David has served as office chairperson 0:00:33.260 --> 0:00:36.140 before setting up this think tank. He worked for city 0:00:36.140 --> 0:00:41.830 merchant bank robert, Fleming corporate finance, boutique, Hotpoint, german management consultancy, 0:00:41.840 --> 0:00:47.270 droga investment from London, Oxford and many other places, including 0:00:47.280 --> 0:00:50.339 almost two decades in journalism spending most of that time 0:00:50.340 --> 0:00:53.700 with the Financial Times. David has written six books, the 0:00:53.700 --> 0:00:57.319 last of which is co authored with William keegan and 0:00:57.320 --> 0:01:01.350 Richard roberts is titled Six Days in september black Wednesday 0:01:01.350 --> 0:01:03.140 Brexit and the making of europe. 0:01:03.520 --> 0:01:06.520 I think, given what has transpired lately, David, that book 0:01:06.520 --> 0:01:09.260 needs an additional chapter. Welcome to Covid Time. David. 0:01:10.080 --> 0:01:12.580 Thank you. Good to be with you. 0:01:12.590 --> 0:01:15.760 It is a pleasure to have you, David. Let's start 0:01:15.760 --> 0:01:18.069 with the very latest and with the caveat that both 0:01:18.069 --> 0:01:21.420 you and I recognize things can turn stale between the 0:01:21.420 --> 0:01:24.220 time we record this and the time it comes out, 0:01:24.230 --> 0:01:28.550 the sterling crisis. David back in 92 had the pound 0:01:28.550 --> 0:01:31.560 correcting by about 29% against the us dollar. 0:01:31.860 --> 0:01:34.990 The latest episode of sterling weakness has transpired over a 0:01:34.990 --> 0:01:38.330 longer period of time, much slower moving train wreck if 0:01:38.330 --> 0:01:42.050 you will, but the adjustment hasn't been trivial either. Almost 25% 0:01:42.050 --> 0:01:45.649 from peak to trough. I have a few questions on 0:01:45.650 --> 0:01:48.910 the ongoing episode for you first, your assessment on the 0:01:48.910 --> 0:01:52.330 policy actions and the economic conditions that have led to 0:01:52.330 --> 0:01:54.420 such massive depreciation of the sterling, 0:01:55.370 --> 0:01:58.470 The whole world is in a mess. And we have 0:01:58.470 --> 0:02:02.120 a very strong dollar. That's the backdrop. 1992, we had 0:02:02.120 --> 0:02:06.990 a relatively weak dollar. That was one big contrast this 0:02:06.990 --> 0:02:11.339 time around. The government's failings have been very, very palpable 0:02:11.350 --> 0:02:13.040 in the UK. They were 0:02:13.050 --> 0:02:16.130 We're, of course, also evident in 1992, that was a 0:02:16.130 --> 0:02:18.790 failure of judgment about when to go into the exchange 0:02:18.790 --> 0:02:21.700 rate mechanism. I think that the misjudgments and the pure 0:02:21.710 --> 0:02:25.430 incompetence this time around has been actually much worse than 0:02:25.430 --> 0:02:31.020 in 1992. Also, the government was warned the mistress's government 0:02:31.150 --> 0:02:33.970 and only a short time in office was warned before 0:02:33.970 --> 0:02:37.300 the so called Mini budget on 23 September that this 0:02:37.300 --> 0:02:40.230 could lead to a big market problem. 0:02:40.389 --> 0:02:44.350 They were told by advisers in writing that they would 0:02:44.350 --> 0:02:46.519 need to watch out about the market reaction, but they 0:02:46.520 --> 0:02:49.389 were arrogant about this and they failed to take onboard 0:02:49.510 --> 0:02:52.590 those warnings. So some of this is part of the 0:02:52.590 --> 0:02:56.030 general rather difficult background we have with the Russian war 0:02:56.030 --> 0:02:59.410 and the strong dollar, but I would say 80% of 0:02:59.410 --> 0:03:01.450 this is a self inflicted wound. 0:03:02.470 --> 0:03:06.109 And you place the blame with the Prime Minister's office 0:03:06.110 --> 0:03:09.130 and the Treasury? What about the Bank of England and 0:03:09.130 --> 0:03:12.040 its role. Is it like going on the opposite direction. 0:03:13.060 --> 0:03:18.420 There are strong signs that there are strong conflicts between 0:03:18.419 --> 0:03:22.500 the Bank of England and the Treasury and the prime minister. 0:03:22.500 --> 0:03:24.519 And this is not good news in a crisis. And 0:03:24.520 --> 0:03:28.030 we learned that in 1992 and in many other cases, 0:03:28.030 --> 0:03:30.390 there was actually a surprising amount of coordination in nine 0:03:30.405 --> 0:03:33.304 United Two between the Bank of England and the Treasury. 0:03:33.435 --> 0:03:37.675 This time, Liz Truss has been riding roughshod over some 0:03:37.675 --> 0:03:42.365 of her advisers. She caused the main official in the 0:03:42.365 --> 0:03:46.675 Treasury Sir tom Scholar, to be sacked on day one 0:03:46.685 --> 0:03:47.744 of her tenure. 0:03:48.000 --> 0:03:50.920 This is unprecedented. That this was at the beginning of 0:03:50.920 --> 0:03:54.050 september normally, if Prime Ministers don't like the top civil 0:03:54.050 --> 0:03:56.190 servant in the treasury, they find a way of just 0:03:56.190 --> 0:03:58.880 lodging that person over time, but not on day one, 0:03:58.980 --> 0:04:02.020 This was two days before the queen died. And so 0:04:02.020 --> 0:04:06.000 it added to the sense of great 0:04:06.470 --> 0:04:11.750 Change and dislocation at the Bank of England just a 0:04:11.760 --> 0:04:15.270 day ago. From the time when we're doing this podcast 0:04:15.280 --> 0:04:18.179 did issue a very strong statement about the reasons why 0:04:18.190 --> 0:04:21.430 it brought in this emergency action which took place at 0:04:21.430 --> 0:04:24.790 the end of September the famous shoring up of the 0:04:24.790 --> 0:04:28.839 Gilts market and it justified this action on the grounds 0:04:28.850 --> 0:04:32.010 that they would otherwise have been a huge dislocation with 0:04:32.020 --> 0:04:36.380 pension funds, about 50 billion 0:04:36.750 --> 0:04:41.370 sterling worth of gilts had it not been for the intention, 0:04:41.370 --> 0:04:44.100 which they made saying that they would buy up to 0:04:44.100 --> 0:04:46.800 five billion of guilt today over 13 working days. That 0:04:46.800 --> 0:04:48.779 will run out on the 14th of october and they're 0:04:48.779 --> 0:04:51.540 really staying in that letter and there's very strong divergence 0:04:51.540 --> 0:04:54.750 between what the treasury is doing under its new leadership, 0:04:54.800 --> 0:04:58.440 basically led by truss and the quasi tang the new 0:04:58.455 --> 0:05:01.784 charts of the exchequer and the bank itself. So this 0:05:01.785 --> 0:05:04.155 is very dangerous for markets when you have the feeling 0:05:04.154 --> 0:05:08.035 that these two economic actors at different ends of town, 0:05:08.045 --> 0:05:11.315 one in the city, one in Whitehall operating on different 0:05:11.315 --> 0:05:14.565 principles and with a different set of philosophies. This is 0:05:14.565 --> 0:05:16.235 really very bad news for markets. 0:05:16.464 --> 0:05:21.235 Is there a middle ground for Whitehall and the city 0:05:21.275 --> 0:05:22.515 in this context 0:05:23.730 --> 0:05:29.950 the unfunded tax cuts which Liz truss and her team 0:05:29.960 --> 0:05:31.739 quasi quoting the chancellor 0:05:32.050 --> 0:05:35.670 unveiled on the 23rd of september some of this will 0:05:35.670 --> 0:05:38.849 have to be unwound I believe already we've had a U. 0:05:38.850 --> 0:05:42.440 Turn on the top rate of tax. She wanted the 0:05:42.440 --> 0:05:45.900 top rate of tax to be scrapped. She said it 0:05:45.900 --> 0:05:49.349 was quite Teng's idea. So in a way she's throwing 0:05:49.350 --> 0:05:52.339 him under a bus that has been unwound that only 0:05:52.380 --> 0:05:55.070 would save a relatively small amount of money to three 0:05:55.070 --> 0:05:58.239 billion sterling. That's not a great deal in this context. 0:05:58.240 --> 0:05:58.870 I think they'll have 0:05:58.890 --> 0:06:03.090 to be other measures which will basically reverse some of 0:06:03.089 --> 0:06:06.219 the moves in the mini budget. The point is the 0:06:06.230 --> 0:06:10.040 catastrophic fiscal position of the U. K. Has not fully 0:06:10.040 --> 0:06:15.270 been revealed because the Chancellor and the Prime Minister didn't 0:06:15.270 --> 0:06:20.489 want the Independent office for budgetary responsibility to come out 0:06:20.500 --> 0:06:24.440 with its forecast at the right time. Which were operating 0:06:24.440 --> 0:06:25.630 a bit in the dark. 0:06:25.950 --> 0:06:30.050 But we do think that these unfunded tax cuts are 0:06:30.050 --> 0:06:33.410 going to be extremely difficult to finance and can only 0:06:33.410 --> 0:06:35.979 be financed at higher gilt prices. Hence the big sell 0:06:35.980 --> 0:06:38.650 off in the government bond market that we had at 0:06:38.650 --> 0:06:41.430 the end of september which has only been partly reversed. 0:06:41.640 --> 0:06:45.160 So if you're looking for changes tomorrow as you're saying 0:06:45.170 --> 0:06:48.840 then either they have to resend some of the tax 0:06:48.839 --> 0:06:52.380 cuts and raise more money by tax or they have 0:06:52.380 --> 0:06:56.840 to do a great deal more public borrowing that much 0:06:56.850 --> 0:06:57.060 you 0:06:57.490 --> 0:07:00.700 which is bad for the economy or they have to 0:07:00.710 --> 0:07:04.520 bring in some very unpopular and very socially divisive cuts 0:07:04.529 --> 0:07:06.839 in public spending. Those are the only three things they 0:07:06.839 --> 0:07:09.770 can do. And the cuts in public spending. Not only 0:07:09.770 --> 0:07:12.520 would they be unpopular, they would probably also be 0:07:13.080 --> 0:07:17.110 bad for the economy as well. So either way in 0:07:17.110 --> 0:07:20.690 all these three areas they're looking at a pretty difficult position. 0:07:20.690 --> 0:07:22.790 I think they'll have to do a mixture of all 0:07:22.790 --> 0:07:25.050 these things will be higher interest rates. There will be 0:07:25.050 --> 0:07:27.640 some cuts in public spending but not as regressive and 0:07:27.640 --> 0:07:32.180 especially divisive as some of the rather bad indications have 0:07:32.190 --> 0:07:34.370 have been telling us and they will have to be 0:07:34.370 --> 0:07:38.460 some rises in taxes which goes against the government's philosophy. 0:07:38.490 --> 0:07:41.200 So in all these three scenarios, we're looking at political 0:07:41.200 --> 0:07:42.950 and economic problems ahead for Britain. 0:07:43.680 --> 0:07:49.980 Indeed, David to play devil's advocate unfunded tax cuts. This 0:07:49.980 --> 0:07:51.950 is not the first time in history we have seen 0:07:51.950 --> 0:07:55.989 the americans have done that many times. Reaganomics and Arthur 0:07:55.990 --> 0:07:58.610 laughers invention of the laffer curve have been around for, 0:07:58.610 --> 0:08:01.540 you know, four or five decades and sometimes it seems 0:08:01.540 --> 0:08:04.020 like countries get away with it. And other times even 0:08:04.020 --> 0:08:07.260 with the best of independent forecasts, the market doesn't, you know, 0:08:07.280 --> 0:08:12.110 respect their decision to take some heroic fiscal moves. Um 0:08:12.120 --> 0:08:17.010 what went wrong for this particular juncture? I mean you 0:08:17.020 --> 0:08:19.910 have alluded to the lack of transparency being one that 0:08:19.910 --> 0:08:22.710 the forecasts were not available. People have been acting in 0:08:22.710 --> 0:08:25.410 the dark, but then there's also the cyclical weakness. I mean, 0:08:25.410 --> 0:08:27.720 has this been one case of bad timing and bad 0:08:27.720 --> 0:08:30.880 communication as opposed to the substance being fundamentally bad. 0:08:31.620 --> 0:08:34.710 Some of the substance you could defend because you could 0:08:34.710 --> 0:08:37.860 say that Britain's got a relatively strong national balance sheet. 0:08:37.929 --> 0:08:41.110 Everything is relative of course, but public debt as a 0:08:41.110 --> 0:08:44.370 portion of GDP something that 90% of GDP that's much 0:08:44.370 --> 0:08:46.290 higher than anybody would have thought comfortable 0:08:46.500 --> 0:08:49.699 30 years ago, but it's still lower than Italy lower 0:08:49.700 --> 0:08:52.839 than France lower than japan. Clearly it's a little bit 0:08:52.840 --> 0:08:55.580 lower than the United States sterling though is not an 0:08:55.580 --> 0:08:57.770 international currency in the way the dollar is. And I 0:08:57.770 --> 0:09:01.020 think that's the salient difference. The americans can as we 0:09:01.020 --> 0:09:01.439 know 0:09:01.950 --> 0:09:05.770 funds their deficits through the famous exorbitant privilege that is 0:09:05.780 --> 0:09:09.099 accorded to the world's number one reserve currency Britain doesn't 0:09:09.100 --> 0:09:13.360 have that privilege. So it's a strange paradox that we 0:09:13.370 --> 0:09:17.140 have mr quan Teng. He seems to believe that sterling 0:09:17.140 --> 0:09:20.400 is still the world's number one reserve currency and people 0:09:20.410 --> 0:09:24.570 will therefore fund the deficit without tears. 0:09:25.220 --> 0:09:27.910 And that clearly isn't going to happen. So I think 0:09:27.910 --> 0:09:31.540 it was colossal arrogance actually on the part of trials 0:09:31.550 --> 0:09:34.660 and squatting and some of their advisors or some of 0:09:34.660 --> 0:09:37.760 the advisors did as I say, counsel very strongly against 0:09:37.760 --> 0:09:42.900 this plus grade poor timing plus an unwillingness to even 0:09:42.910 --> 0:09:47.120 talk to some market participants beforehand to gauge the reaction. 0:09:47.410 --> 0:09:51.390 So it is hubris and ignorance. I'm afraid to say 0:09:51.400 --> 0:09:52.900 pretty bad combination. 0:09:52.920 --> 0:09:56.250 David to your point that the pound is not an 0:09:56.250 --> 0:09:59.479 international reserve currency, but the city of London still has 0:09:59.480 --> 0:10:04.160 a sizable footprint in global international finance. Uh, and I 0:10:04.160 --> 0:10:07.110 worry that what has transpired over the last few 0:10:07.120 --> 0:10:11.050 weeks, which has been tumultuous for the UK markets but 0:10:11.050 --> 0:10:13.989 could be a sign of things to come at a 0:10:13.990 --> 0:10:16.770 time when global rates are going up. So could you 0:10:16.770 --> 0:10:20.490 walk us through your sense of the international ramifications is 0:10:20.490 --> 0:10:23.989 the sterling a canary in the coal mine, so to speak. 0:10:23.990 --> 0:10:26.830 For greater shocks, about to hit global markets. 0:10:28.570 --> 0:10:31.040 Well, I don't know whether it really is telling us 0:10:31.040 --> 0:10:33.339 about anything about the future. It certainly tells us that 0:10:33.340 --> 0:10:38.520 the past that we've seen is actually a valid yardstick. 0:10:38.520 --> 0:10:40.839 We've seen this in emerging markets, haven't we? 0:10:40.970 --> 0:10:47.990 In Brazil in Turkey, in Mexico, the action crisis of 1997, 0:10:48.190 --> 0:10:52.340 So it's actually confirming the past, it's also confirming some 0:10:52.380 --> 0:10:56.640 of the past British episodes. So we we saw the 0:10:56.650 --> 0:11:00.360 1976 crisis when Britain had to go to the IMF 0:11:00.370 --> 0:11:04.280 we had the 1967 devaluation of sterling, which was the 0:11:04.290 --> 0:11:08.410 only the duomo of years and years of problems of 0:11:08.410 --> 0:11:10.090 battling against the current account 0:11:10.309 --> 0:11:13.689 deficit in the time of Bretton Woods. So it's confirming 0:11:13.700 --> 0:11:17.200 all that past history tells us that finance can be 0:11:17.210 --> 0:11:20.770 very unstable if you get your sums wrong and if 0:11:20.770 --> 0:11:25.670 you lose confidence, the the worry of course is that, 0:11:25.670 --> 0:11:29.400 as you say, Britain is from a market point of view, 0:11:29.410 --> 0:11:32.980 Britain is an important trading place. It's still without a doubt, 0:11:32.980 --> 0:11:33.880 the number one 0:11:34.370 --> 0:11:38.150 financial trading place in europe, despite Britain having left the 0:11:38.150 --> 0:11:41.390 european union now a couple of years ago, after the 0:11:41.390 --> 0:11:46.120 referendum in 2016. And Britain has taken over from Italy 0:11:46.120 --> 0:11:50.530 now as being the one big source of instability on 0:11:50.530 --> 0:11:53.219 the european markets and it's a bit rich really for 0:11:53.220 --> 0:11:56.600 a conservative Prime Minister, Liz truss who now comes in 0:11:56.610 --> 0:11:58.630 pledging some kind of stability 0:11:58.860 --> 0:12:02.949 and go for growth strategy that she has become singlehandedly 0:12:03.160 --> 0:12:07.010 the number one source of risk and instability on global 0:12:07.010 --> 0:12:09.760 financial markets. This is not a good position for a 0:12:09.760 --> 0:12:13.160 Conservative Prime Minister to be in. So I think it's 0:12:13.160 --> 0:12:16.290 more telling us the cautionary lessons of the past are 0:12:16.290 --> 0:12:18.670 justified rather than a 0:12:18.695 --> 0:12:22.095 pointer to all kinds of unrest in the future. Central 0:12:22.095 --> 0:12:27.125 bankers have been saying to me partly in jocularity, partly 0:12:27.135 --> 0:12:31.425 in sorrow that what Liz truss and quasi squatting has 0:12:31.425 --> 0:12:35.495 served up is actually very solitary for the new italian government, 0:12:35.495 --> 0:12:38.579 which we think will be led by joe joe Georgia 0:12:39.000 --> 0:12:41.640 maloney, the far right leader because it shows her what 0:12:41.640 --> 0:12:45.400 not to do. And I'm absolutely sure that Georgia meloni 0:12:45.400 --> 0:12:47.809 and her advisers are looking at this trust and saying, look, 0:12:47.809 --> 0:12:50.810 this is absolutely the wrong thing to do whatever we do. 0:12:50.809 --> 0:12:53.400 We have to maintain the trust on financial markets, We 0:12:53.400 --> 0:12:55.890 have to do what we can to show we're going 0:12:55.890 --> 0:13:00.000 to be good corporate citizens. They may actually have different 0:13:00.000 --> 0:13:04.300 views altogether, but outwardly they will be showing a good 0:13:04.300 --> 0:13:04.620 deal 0:13:04.633 --> 0:13:07.823 of conservatism and a good deal of orthodoxy, not least 0:13:07.823 --> 0:13:10.433 to curry favor with the creditor countries of europe who 0:13:10.433 --> 0:13:13.503 are supplying funds for italy and I'm afraid to say 0:13:13.503 --> 0:13:18.033 that mrs trust, forgot that she is a person who 0:13:18.033 --> 0:13:21.383 relies on the markets to fund the current accounts ever 0:13:21.383 --> 0:13:26.423 said Mark Carney, the previous Central black Governor coined the 0:13:26.423 --> 0:13:29.003 phrase because I don't really agree with. But he said 0:13:29.123 --> 0:13:30.253 Britain relies 0:13:30.546 --> 0:13:33.856 quotes the kindness of stroke quotes to fund its current 0:13:33.856 --> 0:13:36.925 account deficit. I don't think it's kindness is because people 0:13:36.926 --> 0:13:39.976 think that they can make a yield in Britain. But 0:13:39.986 --> 0:13:42.556 she's she's gone about it totally in the wrong direction 0:13:42.556 --> 0:13:45.016 and she hasn't realized she's got a deficit to finance. 0:13:45.026 --> 0:13:47.096 You've got to be nice to the creditors, you shouldn't 0:13:47.096 --> 0:13:50.866 be arrogant. And that's the lesson that she's failed to comprehend. 0:13:50.866 --> 0:13:53.606 I hope she does understand this actually. I do hope 0:13:53.606 --> 0:13:55.886 that the last few weeks have been solitary. 0:13:56.830 --> 0:14:01.079 So David, you have actually partially answered my next question 0:14:01.080 --> 0:14:03.900 because I was gonna ask you, is there a silver lining? 0:14:03.900 --> 0:14:06.140 And I think from a backhanded way you're basically saying 0:14:06.140 --> 0:14:08.560 that it is a cautionary tale and that's the silver lining. 0:14:08.570 --> 0:14:10.940 We will now have this lesson for the rest of 0:14:10.940 --> 0:14:13.950 the world what not to do anything else in terms 0:14:13.950 --> 0:14:17.559 of UK's public finance and the need for fiscal monetary 0:14:17.559 --> 0:14:20.860 policy coordination. Do you think that the lesson from the 0:14:20.860 --> 0:14:25.170 past few weeks would galvanize you know, better collaboration. 0:14:25.580 --> 0:14:31.310 I think it will Liz truss is not totally unintelligent 0:14:31.320 --> 0:14:36.200 and she's shown remarkable flexibility over the years. Don't forget 0:14:36.200 --> 0:14:39.880 she voted to stay in the European Union in the 0:14:39.880 --> 0:14:43.590 referendum in 2016. She's changed her tune a bit since then. 0:14:43.600 --> 0:14:46.260 She used to be a member of the Liberal Democrats, 0:14:46.270 --> 0:14:46.980 which she 0:14:46.996 --> 0:14:50.366 now ab jurors, she doesn't like the liberal democrats these days. 0:14:50.376 --> 0:14:53.756 So she's well known for her flexibility. She reminds me 0:14:53.756 --> 0:14:55.926 a bit of Groucho Marx, he said, I'm a man 0:14:55.926 --> 0:14:57.976 of many principles and if you don't like the ones 0:14:57.976 --> 0:15:00.326 I've got now, I have got other ones. So it 0:15:00.326 --> 0:15:03.536 could be that there will be a U turn in 0:15:03.536 --> 0:15:06.606 her philosophy. I also think it's good that the Bank 0:15:06.606 --> 0:15:08.400 of England again, as she was a time 0:15:08.412 --> 0:15:10.672 in a slightly backhanded way, has gained a bit of 0:15:10.672 --> 0:15:15.572 solidity and credibility through this. Andrew bailey, the governor, he's 0:15:15.572 --> 0:15:18.352 been in office now since the Covid crisis started, there's 0:15:18.352 --> 0:15:19.902 not been a very happy time for him over the 0:15:19.902 --> 0:15:22.872 last 2.5 years and there'll be people gunning for him. 0:15:22.882 --> 0:15:25.682 He's not been without blame. I have to say there 0:15:25.682 --> 0:15:27.672 have been some mistakes by the Bank of England, but 0:15:27.672 --> 0:15:29.830 he's sitting now in a more comfortable position 0:15:30.000 --> 0:15:33.270 because she's undermined everything else. We have a new monarch. 0:15:33.270 --> 0:15:35.880 We have a new prime minister, we have a new 0:15:35.930 --> 0:15:38.330 permanent secretary of the treasury when they get around to 0:15:38.330 --> 0:15:41.050 appointing that person. We have a new Chancellor of the Exchequer. 0:15:41.050 --> 0:15:43.270 So I don't think they're going to change or try 0:15:43.270 --> 0:15:45.190 to force out the Governor of the Bank of England 0:15:45.200 --> 0:15:47.720 at the same time. He's got another five years to 0:15:47.720 --> 0:15:49.810 go in his mandate and I think he'll be around. 0:15:49.870 --> 0:15:53.590 So if you want a silver lining, you might have 0:15:53.590 --> 0:15:57.830 a bit more institutional stability, particularly the Bank of England. 0:15:58.330 --> 0:16:01.020 And they may be in a better position perhaps to 0:16:01.020 --> 0:16:03.910 influence policy, but I still think it's going to be very, 0:16:03.910 --> 0:16:05.270 very rocky road, I'm afraid. 0:16:06.370 --> 0:16:10.479 Um David, one more question on the sterling crisis before 0:16:10.480 --> 0:16:13.770 we talk a little bit about europe and for this, 0:16:13.770 --> 0:16:16.780 I want to bring one uh you know, quotation from 0:16:16.780 --> 0:16:19.780 your book uh in your book you write and you're 0:16:19.780 --> 0:16:23.280 drawing a parallel between the 97 asian currency crisis in 0:16:23.280 --> 0:16:26.090 the september 92 crash at the pound. And you write, 0:16:26.100 --> 0:16:29.710 the root cause was misaligned exchange rates confronting countries with 0:16:29.710 --> 0:16:33.690 the task of amending monetary conditions for international reasons in 0:16:33.690 --> 0:16:35.140 a way that contradicted 0:16:35.350 --> 0:16:40.320 domestic economic and political requirements. Does that parallel work for 0:16:40.320 --> 0:16:41.260 the U. K. Today? 0:16:42.170 --> 0:16:45.990 I think it's less for sterling, sterling was overvalued, without 0:16:45.990 --> 0:16:48.810 a doubt against the euro and it's gone down a 0:16:48.810 --> 0:16:51.110 bit against the euro. Although nothing like as much as 0:16:51.110 --> 0:16:53.320 against the dollar, I don't think that we've had a 0:16:53.320 --> 0:16:56.910 fundamental misalignment of sterling. I think the problem is that 0:16:56.920 --> 0:17:00.490 we now have through the strong dollar a lot of 0:17:00.500 --> 0:17:04.830 dollar problems through higher interest rates now being transmitted to 0:17:04.830 --> 0:17:06.530 the emerging market economies. 0:17:06.820 --> 0:17:10.190 And I do think that those emerging market economies who 0:17:10.190 --> 0:17:13.390 have now had to suffer quite a large depreciation, they'll 0:17:13.390 --> 0:17:16.500 be importing inflation and they also have to pay much 0:17:16.500 --> 0:17:19.920 higher interest rates on their dollar debt without a doubt, 0:17:19.920 --> 0:17:23.980 that's going to cause huge dislocation for the emerging markets 0:17:23.980 --> 0:17:24.710 at a time 0:17:24.890 --> 0:17:28.000 when energy prices have been high, although they do seem 0:17:28.000 --> 0:17:30.550 to be coming down a bit now. So I think 0:17:30.560 --> 0:17:35.379 that has been the main issue shades of 1997 probably 0:17:35.380 --> 0:17:37.800 not because we don't have fixed exchange rates in the 0:17:37.800 --> 0:17:41.260 way that we did day factor or day jury in 0:17:41.260 --> 0:17:46.250 1997 1998. But there has been a very strong devaluation 0:17:46.250 --> 0:17:48.750 of some of the emerging market currencies and that will 0:17:48.750 --> 0:17:49.700 not bring 0:17:49.710 --> 0:17:53.280 holy good news. I also think over time that the 0:17:53.280 --> 0:17:56.770 rise in the dollar will impede american competitiveness and will 0:17:56.770 --> 0:17:59.830 lead to an overvalued dollar. We've not got there yet. 0:17:59.840 --> 0:18:02.360 I think it might be partly because american manufacturing has 0:18:02.359 --> 0:18:04.900 got a lot stronger than we thought. Maybe that's because 0:18:04.900 --> 0:18:08.580 of technology as well as the Silicon Valley prowess has 0:18:08.580 --> 0:18:13.430 been transferred to the old economy part of America. That's 0:18:13.430 --> 0:18:14.540 why I, there's one 0:18:14.760 --> 0:18:17.540 I think relatively good piece of news which is that 0:18:17.540 --> 0:18:20.830 the american economy is more resilient than many people felt 0:18:20.869 --> 0:18:23.979 they are piling on the interest rate pressure somewhat late 0:18:23.990 --> 0:18:27.260 but better late than never at the Fed America is 0:18:27.260 --> 0:18:31.020 standing up to that. So America is without a doubt 0:18:31.030 --> 0:18:35.139 showing good signs of being the world's leading economy. The 0:18:35.140 --> 0:18:37.470 problem is the rest of the world can't quite keep up. 0:18:38.180 --> 0:18:41.780 Did I want to stick with the sterling one more 0:18:41.790 --> 0:18:45.479 moment please. Um, so we don't have the peril of 0:18:45.480 --> 0:18:49.330 a fixed exchange rate that was clearly exposed overvalued and 0:18:49.330 --> 0:18:52.260 that needed correction 92. We didn't have that over the 0:18:52.260 --> 0:18:55.440 last 6 to 9 months, but the pound nonetheless depreciated 0:18:55.440 --> 0:18:59.150 by 2025%. So if you are 0:18:59.380 --> 0:19:02.800 our primary belief is that the pound was not misaligned 0:19:02.800 --> 0:19:04.580 and therefore it is a different case now than it 0:19:04.580 --> 0:19:07.470 was then wouldn't that then by extension, make the pound 0:19:07.470 --> 0:19:11.060 substantially undervalued. Now, having experienced this depreciation, 0:19:11.869 --> 0:19:14.720 I don't think you can say it's undervalued given the 0:19:14.730 --> 0:19:16.500 size of the problems that we have and given the 0:19:16.500 --> 0:19:20.000 fact we don't know how the funding is going to 0:19:20.000 --> 0:19:23.840 come in and we don't know much at all about 0:19:23.840 --> 0:19:25.980 the future because there will be some changes in policies 0:19:25.980 --> 0:19:28.300 as I've indicated. The one thing we do know is 0:19:28.300 --> 0:19:31.909 that interest rates will be higher in Britain than the 0:19:31.910 --> 0:19:35.030 government would like. That's going to probably increase the scale 0:19:35.040 --> 0:19:37.250 of the recession even though the government is talking about 0:19:37.250 --> 0:19:38.930 relatively shallow recession. 0:19:39.140 --> 0:19:42.270 And so the high interest rates I think will maintain 0:19:42.280 --> 0:19:46.040 sterling as a relatively attractive currency. It will not be 0:19:46.040 --> 0:19:48.370 good news for people who actually live in Britain and 0:19:48.369 --> 0:19:50.590 have to put up with these higher costs on mortgages 0:19:50.590 --> 0:19:53.130 and so on. But that's why I'm not fearing an 0:19:53.130 --> 0:19:59.080 actual sterling crisis. I'm fearing more a recession that will 0:19:59.090 --> 0:20:02.670 certainly still further undermine the government and will probably lead 0:20:02.670 --> 0:20:04.250 to a labor Party victory 0:20:04.410 --> 0:20:07.490 at the general election. It may happen before two years, 0:20:07.490 --> 0:20:11.060 but the next general election is due in around two 0:20:11.060 --> 0:20:13.830 or 2.5 years, there may be an election beforehand. So 0:20:13.830 --> 0:20:17.150 this political instability I think will not be good news. 0:20:17.150 --> 0:20:19.740 But I don't fear a sterling crisis. I think the 0:20:19.740 --> 0:20:23.530 institutions as we have them will be ready to withstand that. 0:20:23.540 --> 0:20:27.630 I do fear a lot of political vicissitudes. It could 0:20:27.630 --> 0:20:28.169 be though 0:20:28.190 --> 0:20:30.460 That a new labor government might actually end up being 0:20:30.460 --> 0:20:33.929 a more stable situation than the outgoing Tory government. We 0:20:33.930 --> 0:20:36.750 saw this of course in 1997 when Gordon Brown and 0:20:36.750 --> 0:20:39.300 Tony Blair came in and that actually led to quite 0:20:39.300 --> 0:20:44.190 a good constellation for several years. So you can't give 0:20:44.190 --> 0:20:47.250 up totally on Britain yet. But there will be big 0:20:47.250 --> 0:20:49.119 oscillations politically, I believe 0:20:49.869 --> 0:20:53.859 by all means David. Okay, we'll switch to europe now. 0:20:53.869 --> 0:20:57.199 Um they are also, you know, confronting all sorts of 0:20:57.200 --> 0:21:01.990 challenges and somewhat reluctantly but inevitably PCB is raising grades 0:21:01.990 --> 0:21:05.689 and we have monetary policy normalization taking place exactly at 0:21:05.690 --> 0:21:07.510 a time when the content is likely heading towards a 0:21:07.510 --> 0:21:08.200 recession 0:21:08.470 --> 0:21:12.110 and talk about sovereign problem. They also have a mountain 0:21:12.109 --> 0:21:15.770 of sovereign debt to manage. So two sets of questions first, 0:21:15.780 --> 0:21:19.680 how are the key institutions of european union standing up 0:21:19.680 --> 0:21:22.860 to the threat of war stagflation and risks of yet 0:21:22.859 --> 0:21:24.060 another debt crisis. 0:21:25.310 --> 0:21:29.690 The E. C. B, as you say, belatedly is raising 0:21:29.690 --> 0:21:31.940 rates and at the same time they brought in this 0:21:32.440 --> 0:21:35.930 instrument to try to combat fragmentation because you don't need 0:21:35.930 --> 0:21:38.220 a Nobel prize in economics to work out that when 0:21:38.220 --> 0:21:40.810 interest rates go up quite sharply as they are doing 0:21:41.010 --> 0:21:43.090 both short term and longer term. This makes life more 0:21:43.090 --> 0:21:46.060 difficult for countries like Italy, which you've got a public 0:21:46.070 --> 0:21:49.399