Message to Africa holds lessons for the UK

Barack Obama has spent the weekend in Ghana. One reason this relatively small West African country was chosen for his first sub-Saharan visit as US President is that the former Gold Coast has just struck black gold.

By 2015, Ghana could pump 250,000 barrels of oil daily – only a tenth of nearby Nigeria’s current output, but worth having.

America is dismayed at China’s growing influence in resource-rich Africa, as Beijing has carpet-bombed the continent with cash. But if US oil majors can get a toe-hold in Ghana, they’ll be well-placed in the broader “Great Game” to control the sizeable hydrocarbon reserves across the Gulf of Guinea.

Obama’s speeches and interviews aren’t focusing on oil, of course. That - ahem! - would be too crude. The official line is that Ghana was picked due to its democratic credentials. There’s something in that. As the first sub-Saharan nation to gain independence, Ghana is often seen as Africa’s political leader.

The post-colonial history of Africa is deeply scarred by the disastrous leadership of corrupt “big men” – brutal dictators who stayed in office for years. Relics of this era survive – not least Robert Mugabe.

Since 1992, though, Ghana has held five genuinely multi-party elections. The most recent was neck-and-neck. Rather than indulge in more inter-tribal bloodshed, though, Ghana’s political elite acted maturely and the incumbent made way for a new President.

The contrast with Kenya is stark. In 2007, a knife-edge election brought chaos to the birthplace of Obama’s father. Amid allegations of ballot-rigging, tribal violence exploded.

For the first time ever, the veins of the world’s most powerful man run thick with African blood. The US President’s inaugural “home-coming” is a very big deal. By choosing Ghana, America is sending Africa a message: “Sort out the politics, and economic progress will follow”.

Energy imperatives aside, this is a legitimate message - a truism Africa needs to hear. Yet I can’t help feeling it’s a home truth too – given the appalling failure of the UK’s leading politicians to rise above the point-scoring and tackle the extremely serious economic problems we face.

The UK is drowning in debt. The total amount owed by our households, firms and the government is staggering - more than five-times our national income. On top of that debt stock, the UK’s heading for a 2009 budget deficit of 14pc of GDP – by a long way, the biggest in our peace-time history.

Yet our so-called leaders have buried their heads in the sand. Voters are crying-out for someone to grab the situation by the scruff of the neck. Global investors are also watching extremely closely, waiting for signs the UK “gets it” and is taking definite and immediate steps to rein-in our deficit, bring our debts under control and put the public finances of the world’s fifth-biggest economy back on an even keel.

If we don’t, the “bond vigilantes” will call time – don’t doubt it. A “gilts strike” will ensue, combined with a disastrous downgrade of our sovereign debt. In the short-term, interest rates will soar, as higher borrowing costs ripple across the economy. For many years to come, our children and grandchildren, as taxpayers, will have to fork out ever more to service HMG’s debt burden.

I am, by no means, being alarmist. I’m merely describing an outcome which, sotto voce, is being widely discussed on international capital markets.

Faced with this reality, the government – inexplicably - has delayed its next detailed statement on the UK’s public finances. We need to openly debate how we get out of this mess. The UK’s creditors need to know our plans. Yet in response, Gordon Brown has cancelled the next budget.

But aren’t the Tories’ “say nothing” tactics just as feeble? The party is almost certain to form the next government. So when it comes to long-term questions, the Tories have a duty now to say what they’ll do – not just to be honest with the electorate, but because our situation is so bad.

If the Tories unveiled workable plans to slash spending, if they begun the task of building broad political support for such actions, the gilts market would react. By making a series of detailed debt-cutting proposals which could be implemented quickly, and by winning public support for them, David Cameron could move the markets.

In ordinary times, political rhetoric influences opinion polls. Such polls are watched, for the most part, only by the narrow political classes. Such is the state we’re in that the next Prime Minister, while still in opposition, could seriously impact actual borrowing costs – and even prevent the UK from enduring the lasting damage and humiliation of a sovereign downgrade.

“Sort out the politics, and economic progress will follow”. It’s as true today as it’s always been. But does Mr Cameron “get it”?

TIME TO RIP-OFF QE OXYGEN MASK

So, for now at least, the Bank of England has called time on “quantitative easing”. Good. Since QE began in March, Economic Agenda has railed against this ridiculous policy – in stark contrast to the vast majority of other professional economists and financial commentators.

The Monetary Policy Committee was widely expected to expand its “money printing” programme last week. The Bank has already created £112bn of electronic balances from nothing, and used them to buy debt instruments from the market.

With only a small amount of its £125bn authorised QE pot remaining, the Bank shocked City investors by turning off the tap. The MPC now won’t be asking the Treasury for permission to extend the programme, though its wait-and-see stance will be reviewed in early August.

The news sent gilt prices tumbling, as the market panicked the biggest buyer of UK sovereign debt would soon run out of “money”. As a result, 10-year yields jumped sharply, as investors demanded higher risk premiums to lend the British government cash.

While the public is deeply suspicious of QE, the vast majority of economists seem to support it. Why? The reason, in my view, is linked to the fact that the UK’s insolvent banks, by selling gilts back to the authorities, and receiving cash balances in return, are using QE as an oxygen mask.

As such, QE is recapitalising, by the back door, banks that should fail – and at everyone else’s expense, given its impact on future inflation. That’s why the City economists who work for such banks - and who dominate the airwaves and influence most newspaper columnists - are so adamant QE is great.

“We can withdraw the monetary stimulus, preventing the inflationary impact of QE,” they spout. Yeah, right. Show me a single episode in history when that’s happened. You print money, you get big inflation a few months down the line. There aren’t many laws in economics, but that’s one of them.

Other Western economies have adopted QE, but none to the same extent as the UK. When the programme was announced, the Treasury stressed QE would be used to buy corporate bonds from the market – an action which, in extremis, and within strictly defined limits, may just about be justified.

In reality, the UK's QE binge is open-ended and 99pc of the created cash has been used to buy gilts – financing our wild government spending in a circular fashion akin to a banana republic.

Almost half the gilts issued so far this year have been bought by the Bank of England – compared to just 20pc in Japan and 10pc in the US. That’s why the UK’s situation is so desperate and the markets so spooked that QE could soon end.

Liam Halligan is Chief Economist at Prosperity Capital Management