Burnham’s rise, market implications, new Federal Reserve, interest rate expectations. And inter galactic speculation, up like a rocket…
New Governor, Old Rates
In US Fed Governor Warsh we get a real economist, even if inevitably with an Ivy League law degree on top. But a credible mechanic to fix the car, not a simple recorder of faults. The danger is either the repairs themselves fail, or indeed fix a non-existent problem. He has already been induced to over promise. For all that this is a logical, sound money, experienced chair. The dollar cheered up at once.
Warsh was horribly clear that inflation is a monetary problem, that anything fiscal lives elsewhere, and just as clear that monetary policy can fix it. Definitely a time warp. I also never expected to hear dialectics mentioned in an American Central Bank review, a phrase steeped in Marxist economics, more at home in a Cuban workers council.
Any rational Fed should be raising rates now, but it won’t. I see this as a post Mid-Terms step, November would be convenient.
He was right to point out monetary policy looks lax, not tight, given the stock markets, while it is possible sound money policies will bring the long-term interest down, making 30-year mortgages cheaper. If he does get inflation back to 2. something (a slightly soft target), all interest rates have some leeway. There is no need for high real rates, with inflation controlled.
I also don’t see even a couple of rises crashing the US Labour market. So, a recession feels unlikely.
His multiple new task forces have unrealistically short time frames, for any serious impact on the Fed balance sheet, productivity, or statistics, but will set other steps in train, and all could do with revisiting. But all will still be tainted by long term Fed think, too reliant on in-house staff.
I celebrate the return of an economist, a real one, for too long smooth-talking lawyers have been in charge, they are great at interpreting the intent of long-gone feudal lords squabbling over property rights, or indeed slave owning revolutionaries, but know little of the real world.
The economy is a living thing, it evolves, pulses, everything in the ecosystem affects everything else; nothing is fixed, it has to be studied, cared for, and above all understood.
Down like a stick?
We also now have had a taste of the volatility from giant IPOs, Wall Street will first feast and then set up a great capital destruction cycle, but that is just what markets do. I see investors (not traders) looking to build non-US positions, across the globe. But still with no clear consensus as to where.
SpaceX controls are now set for the heart of the sun.
All change
Burnham pretty well performed as expected by the opinion polls, through the campaign. It indicates that Labour remains popular, it is just Starmer that people hated. In which case Andy will have a fighting chance of at least staying as leader through this Parliament, a curiously low bar.
I fail to see Reeves can survive, she is Starmer’s creature and much of the failure, rightly or wrongly, will be hers. Nor do I see Labour MPs, in theory hand picked by Starmer, as an odd Blairite hybrid, have much continuing interest in centrist realism of the Streeting type.
Will there be a “proper” policy debate? We think not – its media self-serving piffle. The last thing we need is more bargain basement compromises, Starmer’s flaw was over promising on fiscal rules, trying to scoop up another 50 seats which he did not need, and they now feel they owe his prudence nothing.
What is Starmer still hoping for then? A leadership contest is a three-way beast, we know the MPs are sick of him, and so it seems are members, but what about the unions? They do deals: remember that the so-called affiliates put Ed Miliband in, as leader over both the other two parts. Starmer wants at least to know their price; Burnham thinks he has their vote, without needing to give too much away.
We will therefore have a woolly charmer not a reformer. The real impact will still be from Starmer’s policies, which I think will be broadly positive, as they pass through the execution phase. Electorally Burnham wants the Green votes back, but he is far less London focused than Starmer, and not especially keen on ethnic politics either.
I suspect he will be happy for Reform to keep many of their votes, seeing them as stolen Tory ones.
What is his aim? From here an outright majority at the next General Election still feels tough, but a coalition which he leads is possible.
The by-election saw him win more votes than all other parties combined. The noise about Restore was largely spurious. Reform don’t have any candidate depth, and to some extent their choice was naïve. They are riding a wave, not creating it.
As for Kemi, as leader of His Majesty’s Opposition, downing the incumbent Prime Minister is a fine notch on her belt. While also winning the Aberdeen seat from the SNP. Hard left fantasies are not always popular, even dressed in tartan – the apparent surge in tactical pro-Tory voting is startling. They hoped to win, but never expected a shift of such magnitude. It shows historic Tory seats remain well founded.
She will find Burnham a harder target – fewer promises, and comfortable holding multiple viewpoints – so Kemi will start scoring against him, but not yet.
I have long expected the Labour party to crash sterling, something they reliably do. I am not sure that view changes, they have three more years. It is sterling that unseats them, not directly the bond market.
The economic damage, inherited or not is real. This will take a long time to heal, despite a no doubt generous easing of fiscal rules, and a few noisy tax cuts heading into the last year of this Parliament.
Will we still weave our way out of the time warp?