Theresa May's barnstorming populist turn has coincided with two curious phenomena:
One has been increasing public scepticism at Quantitative Easing or QE (the expansion by Central Banks of the size of their balance sheets through the acquisition of assets with long term maturities - a.k.a. money printing).
The other has been the descent of neo-Keynesian European federalists into the most unlikely hand wringing about the post-Brexit slide in the value of Sterling.
The latter is more than a little amusing. Firstly, as I've already opined, the real cause of Sterling's drop has been that the UK's nearly 6% current account deficit, which is indicative of Sterling's traded value being a function of a Sterling asset bubble (which a cursory glance at the website of London estate agents evidences rather well). Brexit merely drew attention to this bubble and pricked it, hence Sterling's post-Brexit slide. Secondly, the likes of Jonathan Friedland, Gideon Rachman and George Osborne seemed strangely unconcerned at Sterling's QE-induced collapse in 2008. These people supported QE but opposed Brexit, leading to the inevitable conclusion that they have simply jumped on the falling Pound as a stick to beat Leavers with. This impression has been confirmed by Bank of England Governor Mark Carney's policy response to Brexit. If the fall in the Pound were a genuine top priority of the pro-Remain establishment, they would presumably have followed Sir Geoffrey Howe's early 1980s lead of jacking up interest rates and shrinking the BoE balance sheet in order to counteract the downward pressure on Sterling. Instead, Mr. Carney showed his true priorities by instituting subprime interest rates and more QE (i.e. the British establishment is so concerned at the fall in the Pound, that it decided to devalue it further).
The basic economics are simple enough. When your currency is overvalued, you can allow its value to fall to its true level or you can reduce its supply and increase the policy interest rate in order to raise its true value to its market value. The latter, which would increase interest rates for savers and make government borrowing less affordable, would be my preference. However, if this is politically unfeasible (and alas, it is) devaluation is the solution. The Sterling bubble allowed the Bank of England to have it both ways: higher asset and property values; cheap credit for borrowers (including the deep in the red UK government); and low inflation (due to the Pound not falling to its true value). Of course, as Ireland's IMF bailout administrator Ashoka Mody and Mr. Carney's much more sensible predecessor Mervyn King have pointed out, an overvalued currency has given the UK economy a form of Dutch disease, which has made Britain's export manufacturing extremely uncompetitive. What the falling Pound means is that air is released from the London bubble to the relief of Britain's regional manufacturing economy. It's funny how the Guardian extolled the virtues of transferring wealth from London to Britain's hard pressed regions... until it actually happened.
QE and bailouts lie at the heart of how Britain's (and the world's) financial elite cherry picked their favourite elements of socialism and the free market; demanding and getting the freedom to speculate wildly on the asset markets, all the while receiving bailouts when it all went wrong in 2008 and QE and zero interest rates thereafter. These policies had the effect of inflating a new bubble in assets. This bubble included a dramatic chain selling of public debt, which has allowed insolvent governments to keep spending money like it's still 1999. Locked in this ironic embrace has been the financial services sector which has richly creamed off gains from this monetary expansion. Meanwhile, political uncertainty (especially in the Eurozone) has led to a flight of capital into Sterling assets which has sterilised inflationary effects and added to the bubble expansion. Outside of the elite, the public sector and the welfare-addicted underclass, the returns were negative.
The cost of housing in prosperous conurbations like London and the stockbroker belt rose dramatically and exiled middle income earners to the exurbs. For those outside the big cities, QE, ZIRP and bailouts have done nothing to raise real business investment. Meanwhile, the overvalued Pound which has allowed this bubble to inflate unchecked made manufacturing uncompetitive, leading to stagnation in middle income jobs. For middle income savers who can't play the wild financial markets, the return on savings interest has been eviscerated by cheap money. Finally, the yield on Gilts and high quality bonds has become so low that private pension funds struggle to buy decent retirement annuities for people with private or occupational pensions.
The UK government has spent the last eight years extolling the virtues of QE, whilst constantly repeating its fidelity to the free market which QE so horribly distorts. Mrs. May's volte face is stunning. In the same speech in which she abjured her party's traditional allegiance to the free market, she has begun to inch away from Central Bank monetary activism. Her assessment of the results of QE are indicative of this move:
"People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer."
In the long term, there can be no better way in which to resurrect the political viability of the free market than returning to the high interest rate and tight money policies so successfully deployed by Sir Geoffrey Howe and Paul Volcker in the early 1980s. Just as those policies slayed the demon of inflation in the 80s, today they can reverse the post-crisis trends of unaffordable homes, insecure retirements, stagnating wages, derisory savings interest, stagnant manufacturing and the upward redistribution of wealth. If she has the courage to follow through with her professed QE scepticism, both Sterling and the free market may have found an unlikely champion in Theresa May.
So, to conclude this series, if this is what passes for populism in 2016, then let's have more of it. Godspeed Mrs. May, Godspeed.