By Buttonwood: SUSPICION of British economic policy is mounting. Recent posts (here and here, for example) have highlighted my view that things are in a mess; the economy is flat and the government is missing its deficit target, even with the help of dubious accounting; inflation is above target and set to remain so, yet the Bank of England seems likely to ease further; sterling is the weakest major currency this year and the previous depreciation did little to help the trade deficit. Reading Dominic Sandbrook's account of 1970s Britain, Seasons in the Sun, is a reminder of the similarities and differences from that benighted era; back then there was a wage-price spiral which is not visible now. Of course, that era had strong trade unions that tried to protect their members' standard of living; this time round, imported inflation eats into real wages. The effect is less dramatic but it is still significant.
Other commentators are reaching similar conclusions. Erik Nielsen of Unicredit writes today that
with the risk of sounding like a broken record, a weaker currency makes you poorer. In 1967, when the UK devalued the pound (by 14% against the dollar), Prime Minister Wilson famously assured his countrymen that “it does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.” I suggest that the day of such attempted money illusion has long gone, and why policymakers still tell their people that depreciation is a good thing beats me. If they think they can still fool the population, the London Sunday Times today includes an article titled “The smart way to holiday with a weak pound”, which starts as follows: “The plunging pound is sending holiday costs spiraling …”.
And speaking of the Sunday Times, David Smith is one of the most respected economic journalists in the country. He writes today (behind a paywall) that
I am no longer sure monetary policy is safe in (the Bank of England's) hands
Short of erecting a sign on Threadneedle Street saying "Sell Sterling", the Bank could barely do more than signal its desire for a lower pound
The pound, clearly overvalued in 2000 when it was €1.70 is undervalued now at €1.16. It should not now be falling against a euro whose problems go beyond the tendency of Italians to vote for clowns. For the Bank to try to push it down is wrong.
Before concluding that the Bank
has rarely hit the 2% target for the consumer prices index over the past eight years and, on its own forecasts, will not do in the next two to three years. A decade of above-target inflation is, for any central bank, flaky. The Bank has lost its compass.
Not everyone will agree with these comments but this is the second blistering attack on British policy in recent days; the first by the economics editor of the FT (the accounting piece referred to above) and now the economics editor of the leading Sunday broadsheet. Of course, what international investors think is more important than what people in the media think, but the latter do influence the former.

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