Missing man: Carney’s policies matter as much as Osborne’s

    Missing man: Carney’s policies matter as much as Osborne’s

    Like Christmas, but not in a good way

    23 May 2015

    Well, few saw that coming. After a drearily overlong campaign, election night managed to surprise us after all. This election has otherwise felt a lot like Christmas. Interminable commercials, a season hijacked by the venal and the immature — and the adults end up paying for everything.

    But it’s nice to see that the pollsters got it badly wrong, just as they did in 1992. That election was my first and last experience of political spread-betting. City colleagues back then felt — correctly — that the polls were overstating the Labour lead and had misjudged the popular mood, and asked me if I wanted to join them in ‘buying’ Tory seats. I nonchalantly said I’d bet a fiver. I didn’t appreciate at the time that I was betting a fiver a seat.

    That was the first election I followed throughout the night as each constituency reported. This was the second. Just the sight of Ed Balls being defenestrated made it all worthwhile. Anyone suspicious of authoritarianism will have welcomed the savaging inflicted on Labour and the Lib Dems by an electorate clearly comfortable in the middle ground.

    Sterling welcomed the outcome with a relief rally, as did the FTSE 100. The equity bull market now feels a little long in the tooth, but what are the practical alternatives? UK Gilt yields remain repellent to anyone experiencing brain activity. Trying to assess the market’s ongoing response to a Conservative victory is also trickier than normal, because the financial market is no longer a free market as such — since the financial crisis, it has been largely a plaything of the state. Base rate has been slashed to its lowest level since the Bank of England was established in 1694. Gilt yields have been kept artificially low through quantitative easing (and by regulatory coercion of pension funds, which are barely allowed to invest in anything else). QE, allied with near-zero interest rates, has caused capital to flood into financial assets, including bonds, stocks and property. Markets are said to hate uncertainty, but it is the apparent certainty of the Bank of England’s determination to keep rates suppressed that represents one of the biggest risks of all.

    In the past week, German government bond yields have shot up despite the explicit support of the European Central Bank, which has pledged to buy them as part of its own stimulus programme. There is no market riskier than one rigged by central banks. As Margaret Thatcher once said, you cannot buck the market forever.

    In keeping with an election campaign long on windiness and short on accuracy, popular attitudes toward economic trends have been misguided, not to say misreported by the media. There has been no real deleveraging since Lehman Bros blew up, certainly not by the state. The coalition’s debt reduction programme ended up adding more to the national debt in five years than the previous Labour regime managed in 13. Under the coalition, the terms ‘debt’ and ‘deficit’ were handily conflated (in the same way that legal tax avoidance and illegal tax evasion became blurred), and the media were complicit in the process. A little fiscal honesty by the new government would be welcome, but is highly unlikely. Facing down an overexcited Scottish National Party, which now looks at English taxpayers’ wallets with envious eyes, is not going to be George Osborne’s easiest challenge in the months ahead.

    Voltaire is credited with the observation that while doubt is uncomfortable, certainty is absurd. This election leaves many uncertainties remaining, not least a number of potential geopolitical fractures: Grexit, Brexit, even Scoxit. And the two most important figures for the UK economy were not involved in the voting: Mark Carney, the Canadian governor of the Bank of England, and Mario Draghi, the Italian governor of the European Central Bank. While the Tories were celebrating, Europe’s government bond markets, with their yields spiking sharply higher, were warning ominously of the practical limits of QE. After a multi-decade orgy of government spending across the developed economies, the debt hangover remains. An emboldened Tory government may be more likely than its opponents to tackle the deficit, but the real austerity is surely still to come. David Cameron may end up wishing he had lost after all.