On July 24, British Business Secretary Vince Cable was interviewed on the BBC’s Andrew Marr Show. During this interview, Cable made the case for further quantitative easing (QE) if consumer demand in the UK continues to weaken. While he was quick to point out that the Bank of England runs independently, he provided a ringing endorsement for printing more money as a solution to poor economic conditions. Add this interview to my list of reasons for remaining bearish on the British pound (Bank of England governor Mervyn King gave me a fresh reminder last month).
Here is some of what Cable had to say regarding the British economy and QE (click here for the 3-minute video clip):
In answer to a question about the “state of growth”, Cable replied “it isn’t great, and it’s not surprising that it’s not great because of the problems we inherited: the aftermath of the banking collapse, recession, the unsustainable boom, the fact that we’ve got to put the public finances in order, the external difficulties in Europe and elsewhere…” Note well that Cable joined the Parliament in 1997, so when he uses the term “inherited,” he must mean as a coalition cabinet member and not just as a member of government.
Despite these problems, Cable claimed that confidence exists in the U.K. economy, comparing it to Germany’s economy and contrasting it to Greece’s economy. Moreover, there is evidence of “rebalancing” in the economy, and the “beginnings of the rebirth of manufacturing and exports”.
Marr snapped that the “growth is not there.” Cable responded by recognizing that “there is a genuine problem with demand, consumer demand. And again, it is not surprising there have been big shocks, world commodity prices going up has had a big effect on confidence here…” Cable did not acknowledge that weakening the currency exacerbates the problem of high commodity prices, but he credited the Bank of England for keeping interest rates down and expanding the money supply to deal with the economic problems. (Two weeks ago, I noted how the British pound is “quietly” selling off).
Cable is a definite fan of quantitative easing: “…if there is a sustained period of weakness of demand…it is about the Bank of England pursuing policies of low interest rates that also helps keep our exchange rate down and helps exports. But also using the expansion of QE perhaps in more imaginative ways, not just acquiring government securities … If we have a continuing problem of weak demand that is the way to deal with it.”
Cable punted on providing more details on what a more imaginative QE might look like; he described them as being extremely technical. With Tuesday’s GDP numbers expected to show a poor performance for the UK economy, the Bank of England’s powers of creativity may very soon be put to the test.
Be careful out there!
Full disclosure: net short the British pound