QE not the answer to UK’s problems
IF the Bank of England is to be believed, more quantitative easing is necessary to make sure inflation doesn’t fall below its target. Yet the Bank’s record is not good enough to allow us to take it on trust. Simon Ward of Henderson calculates that the Bank’s forecasts for inflation in one year’s time have been wrong by a whole percentage point on average since 2005. Astonishingly, one would have been better off using the simplistic rule that inflation in 12 months’ time will be the same as now – this would have given an error of just 0.4 percentage points and been far more accurate than the Bank’s fancy models.
QE isn’t always bad, and the drop in the money supply at the end of last year is worrying. But it was probably caused by a combination of a shrinking economy and the new rules forcing banks to contract their balance sheets and hold more capital and reduce non-liquid assets (of which loans are a key component). Trying to tackle both these problems via ever more QE is silly: once again, rather than addressing the root cause of a problem, our policy-makers are tackling their consequences, creating additional problems (the risk of inflation and bond bubbles) in the process. Why doesn’t anybody ever learn?
THROW GREECE OUT
It’s time to end this Greek charade. Yes, an internal deal has been agreed, and it may be that the Eurozone signs up to it, despite sceptical noises last night – but even if it does, Greece will never actually be able to deliver what it is pledging, and even if it did it this wouldn’t be enough to save it.
It is time to admit defeat, accept that the Athens government must default, allow credit default swaps to pay out and kick Greece out of the euro. There will be contagion to Portugal and other places regardless of whether Greece stays or leaves. Such a move would be good, over time, for Greece, which will never readjust and boost its competitiveness within the single currency. Short-term, being booted out and the ensuing financial collapse would be extremely painful for ordinary Greeks, and for anybody daft enough to retain exposure to that country, but there is no better solution. The market needs to be allowed to work. Lenders must grow up and take the hit. Yesterday’s agreement may buy the current rotten system a little more time – but economic reality is like gravity: it can’t be defied forever.
GOOD SERVICE PAYS
One positive story in today’s paper is worth highlighting: the strong growth in profits and assets at Hargreaves Lansdown, the Bristol retail financial firm. Customer service in the UK remains woeful, especially when a telephone call is required: with few exceptions, the large retail banks, insurance companies and energy firms seem unable to treat their customers properly. It’s a disaster. One ends up spending hours on hold, speaking to unhelpful, incompetent or badly trained staff, chasing paperwork and being passed from department to department at some remote location. Poor service is the single biggest reason so many people distrust large companies. One glaring exception is the stellar service provided by Hargreaves Lansdown: staff pick up phones immediately, are polite and articulate, and know what they are talking about. It is a breath of fresh air – and a model other firms must urgently follow, for their own good and that of capitalism.
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