Underneath the crude politics of the Queen’s speech were two great watersheds. This week was the passing of an era.

The government seems to have moved on from any idea that we can win a war in Afghanistan by pitching troops into battle to win and hold territory. The impossibility of putting in enough troops to garrison that vast and difficult country has at last dawned on Ministers. Whatever they may say, the hunt is now on for an honourable exit that can leave us with some reason for past sacrifice and with some hope for the future. Even if reinforcements are sent in the short term, the remit will be fundamentally different. The aim will be to support the civilian power and to reinforce a political strategy rather than to win and hold territory. The West needs to talk more and fight less in the Middle East. It now also needs to pursue its own self sufficiency in energy to curtail the power of King Oil.

The second even starker watershed was the one on public spending and borrowing created by the government’s Deficit Reduction Bill. This Bill has two origins. The first is the Treasury led market imperative. The deficit sums are so implausible that it is only a matter of time before the markets force up interest rates on government debt. Even this government will have to stop the printing presses soon. The Treasury is seeking to reassure that sometime soon the government will take its deficit in hand and start to return it to more realistic levels. The second is the manic politics of this dying administration. Labour strategists think it would be a good idea to force the Tories hands, to smoke them out, to put them in a straightjacket for a future Parliament should they win. The government wants Conservatives to have to run on Labour spending plans for the next Parliament so they can portray them as the party of cuts.

It is one of the stupidest attempts at digging a poltical trap I have ever seen them attempt. No incoming Conservative government need feel bound by Labour spending plans, even if they are set out in law. All would expect a Conservative Chancellor, if one is victorious, to review the public finances urgently and produce a new set of spending plans tailored to the needs of the economy, the fears of the markets and the priorities of the new Parliament. It would be a minor matter to repeal or amend any Budget Law he inherits as part of his first Budget, with the Finance Bill offering the obvious legislative route to put things back on a more normal budget footing. There is no need for a Tory to walk into Labour’s trap. It can be sidestepped by behaving normally.

It will instead prove to be a trap for Labour. Now the Opposition does not need to have its own answer to the question how big need the cuts be. It will be able to say that halving the deficit by spending cuts is a necessary good start recommended by the government to its successor. These can rightly be seen as Labour cuts on Labour spending plans. Some of the balance of the deficit may be curbed by economic recovery. The Conservatives may wish to shift the priorities when they see the small print of the Labour plans in the Pre Budget statement. They need not incur Labour’s wrath by suggesting a different total, as Labour itself is proposing almost £100 billion of spending cuts or tax increases.

Dear Shareholder,

What a great week. We were able to announce record October borrowing levels, and a big leap in inflation. Our strategy of never knowingly underborrowed is going so well. You know you can rely on us to waste more and spend more than anyone else in the market.

Even better news was the coup I managed at the European sales conference with other state companies. We pretended to want to make our former CEO of UK PLC boss of the whole European outfit. That got them scared. He was even more disliked over there than here, and the last thing they wanted was more of what we had to put up with for ten long years when he was running the company. Do you remember those dark days? As Finance Director I had to follow some strange rules about borrowing and turn down some requests for more spending, whilst finding the money for dangerous missions in the Middle East.

So when they were all wound up about the possible return of my predecessor, I said we could be persuaded not to press his suit if we could be given the job of Overseas Director instead. They fell for it. So now we have been able to promote one of our former sales ladies to this role. I am sure having a representative placed in the higher escelons of the European structure will help us in our task of spending and borrowing more. I am pleased to say our financial contributions to the European joint venture are rising strongly, which helps with the expansionary budgets we are setting. They are masters at wasting other people’s money. I do so admire that in them.

Yours in delight

CEO

I was asked again yesterday on this site what I would do to cut the deficit.

Just to recap, my advice to the government for this year has included:

1. No more banking subsidies – saving £31 billion cash and £8 billion contigent liability
2. Public sector wage freeze – saves around £6 billion
3. Recruitment ban on all public sector jobs other than front line ones like teachers, nurses and doctors – saves around £5 billion by end of first year
4. Scrapping ID cards, regional government and some other quango overheads- £4 billion
5. Not cutting the VAT rate – collects £12.5 bn more revenue

Total saving £66.5bn or one third of the current deficit. In following years there need to be bigger cuts in the size of the government overhead, welfare reform to cut the cost of benefits by getting mroe people back to work, and substantial reductions in local spending along the Fulham and Hammersmith lines.

Yesterday we heard from President Karzai in Afghanistan. The man whose own election was dogged by allegations of ballot rigging duly pledged himself to clean up Afghan politics as the US wished him to do. He went on to state that he wanted foreign troops to remain for a further five years, during which time they would train and support the Afghan security forces as they gradually took over the task of policing the country.

The good news in this is the implied change of policy for the Western allies. It seems to mean an end to any idea that western troops can fight their way across the whole of Afghanistan and garrison it against the insurgents. It still leaves open the issue of whether this new central government in Afghanistan can gain enough popular support to create a unified state in a country renowned for its tribal and local loyalties. The West should insist on a tighter timetable for their withdrawal, and should want a stronger political strategy to try to find a way of governing Afghanistan locally as well as centrally that will keep the terrorists out. Keeping foreign troops in Afghanistan in fighting roles will not speed the end of the insurgency, as the last eight years has demonstrated.

Meanwhile, we are now told that a Mr Van Rompuy is to be President of the EU and a Baroness Ashton to be the first EU foreign Minister. We, the electorate paying their salaries, did not even know Lady Ashton was a candidate. We had no chance to cross examine Mr Van Rompuy on his shrill federalism. It is a rare sign of political skill by the EU over this whole ghastly Lisbon process that they are underselling these people and these roles, realising how incensed the UK – and many Eurosceptics elsewhere in Europe – are about this whole development. The words coming out of Brussels tried to play it all down, saying Mr Van Rompuy will be a chairman and administrator, not a proper President.

However, at the news conference they could not keep it up when there were questions. The answer to who should the USA ring when it wants to rign Europe was answered by saying that they should ring Lady Ashton, the “EU’s foreign Minister”. So there we have it. The federalists rule. They know their coup was both undemocratic and unpopular. They may go gently at the beginning. However, choosing unknowns will not prevent them soon becoming all too well known. The intention is to move forward the project of a European superstate. This is an important part of the architecture. It means a lot of trouble ahead. Let us hope the German and French governments get worried about their monstrous creation. The UK certainly will be, as most of us wanted to prevent the whole thing in the first place.

Whilst I share the Opposition and majority media view that the Queen’s speech was mainly hot air and party spin, I think one of its features has decisively changed British politics, fundamentally and for several years to come. It is the core admission in the Speech written by this Labour government that our public deficit is far too high, and needs to be halved.

Their late espousal of this cause tears up all that rhetoric about Labour investment and Tory cuts, and has put paid to any idea that a re-elected Labour government could carry on defying the laws of financial arithmetic by spending and borrowing as much as they pleased. What is remarkable is that many MPs and commentators have not woken up to the magnitude of what was said. Even this government, a lover of spending and borrowing, has said before an election that it at least needs to halve this deficit in four years.

The deficit is estimated to be running at between 12% and 14% of national Income. It is, as David Cameron reminded us, double the level of deficit relative to the size of the economy that the UK struggled with at the time of the IMF loans in the 1970s. It is massive, growing too rapidly, and out of control. Today’s figure for October confirms that the Treasury was not for once overestimating it when they forecast £175billion of borrowing for the year. Some forecasters now think it will be £200 billion. This surge in borrowing is an interesting backdrop to the decision to print another £25 billion.

Halving it means either cutting spending or raising taxes, or some combination of the two, to the tune of 6-7% of National income. That is around £100 billion of annualised spending cuts or tax increases. Yes, almost £100 billion. £100,000,000,000. £2,500 each for every adult.

All my political lifetime I have watched as political parties have fought over the odd few hundred millions. In more recent years they have battled over a few billions. As I write this the main political row is about £700 million of spending on the disabled. Suddenly, if UK politics is to rise to the challenge, we need to be discussing tens of billions to make any difference.

I asked the Prime Minister in the debate yesterday how he recommened we did cut the deficit by around £100 billion a year. He gave me three proposals, all of them tax increases, all of them announced, all of them tiny in comparison to the magnitude of the task ahead. He did not mention a single spending cut.

When I set out these broad numbers to the House, Labour MPs looked alarmed. Their front bench had not told them how big the cuts will have to be, or how huge the tax increases if that is their preferred route. Nor did anyone say to them that even if you confiscated the income of all the rich who remained behind to let you do so, you would come nowhere near sorting out this massive deficit.

Whoever wins the next general Election, curbing the deficit is going to dominate the Parliament. The next government is going to have to reduce spending in a way no government has ever done before in this country. They will have no choice. If they decide to tear up this deficit Bill and carry on spending, the markets will rise up against them. Any recovery will help mend the deficit, but the recovery is needed to start to curb the other half, the half of the deficit that may be cyclical, the half that the government’s Deficit Bill would otherwise leave untouched. The sobering thought is that even if this Deficit Bill were implemented, without economic recovery the remaining deficit would still be as large as the one we had when we went to the IMF in the last big spending crisis.

I spent yesterday afternoon in the Chamber listening to the exchanges between Prime Minister and Leader of the Opposition, before making my own speech on the government’s programme. This morning I spoke briefly to a breakfast meeting about the world economy, joined a regional TV debate on the deficit and Afghanistan, and went on to talk at a conference about global markets. That is why I am late today in posting.

We had all read the main contents of the Queen’s speech ages before the Queen was asked to tell us. The Labour benches contained many empty seats. Presumably some MPs clearly decided that as there will be no votes before next Wednesday there was no great point in turning up at all. They would get a better view on the TV if they were interested, and they already knew what was in the programme.

The government further undermined the solmnity and importance of the occasion by brieifing that the Speech was just a bit of politics designed to snare the Tories. Some of the bills are a caricature of spin politics.

They propose a Bill to halve the public deficit in the years ahead! Why does a government need to legislate to control its own spending? All it needs to do to curb the deficit is to spend less. It can set out in its budget documents how it will curb the deficit.

They propose a billl to control the rewards of bankers. As they own two of the biggest banks, why don’t they simply put in a pay policy to those banks that reflects their views on bankers’ pay? Why legislate to control your own pay policies?

They propose to make cluster munitions illegal. As the government is the only body in the UK that could possibly buy cluster munitions, why not just announce they are never go to buy any again? I am pleased to report there are no cluster munitions in Wokingham shops,and no demand for them.

The government has made the whole spectacle a non event, by too much spin, too much ill thought out legislation, and too much crude politics.

Parliamentary Questions used to be one of the prime ways MPs could hold a government to account, keep Ministers on their toes, expose problems and probe mistakes. Labour used to be quite good at them in Opposition. Once in government they decided on their slow strangulation, to prevent the Opposition using them in the way they did.

PQs worked for several reasons. MPs had privileged access to information through them. On behalf of the public they could find out things that others were unable to. The assumption was that if the government knew the answer it had to supply it to an MP unless it compromised national security, commercial confidentiality or was a sensitive matter about an individual. The answer was published in Hansard. The press and media regularly read Hansard answers, often finding good stories from the MPs’ detective work.

The Freedom of Information legislation effectively removed the privileged access for PQs. Anyone can now ask a good question of the government, and have an equal ticket in the lottery for an answer. All will encounter delay and reluctance to part with information, especially MPs with a reputation for asking good or embarrassing questions. A member of the public may draw a better lottery ticket than an MP when trying to get to the bottom of an issue. It may suit the government to let them know rather than the MP, as their answer does not have to be published in Hansard and they may less access to the media than an MP.

Some time ago I highlighted here the large sum of money we gave via the Financial Compensation scheme to Santander to take the retail deposits of Bradford and Bignley. No-one would run this story in the media, as the spin had told them something different.
Recently I revisited this issue, and asked the Treasury

“Whether any public money was provided to Santander in respect of Bradford and Bingley’s deposit liabilities” .
The answer admitted they did make payments, but as always it refused to give away the crucial details:

” Details of the financial support provided to banks in 2008-9, including the amounts involved in the transfer of Bradford and Bignley’s retail deposits to Abbey, are set out in the Treasury’s Resource Accounts for 2008-9″

Notice they not only decline to provide the true answer on the Hansard record, for fear no doubt of it being reported, but they also change Santander to Abbey, presumably because Abbey is a British bank. They do not wish to acknowledge that we financed a very handy large cash injection to a large Spanish banking group at the same time as nationalising a couple of our other banks.

I asked about the highly charged issue of bonuses to bankers in banks subsidised by taxpayers. I asked particularly “How much has been allocated for the payment of bonuses to staff by banks and financial institutions in receipt of public money in a) 2008-9 and b) 2009-10?”

You would have thought they both knew and could answer at least with respect to the year completed six months ago. Instead I was told

“The banks in which the government is a shareholder are managed on an arms length commercial basis by the UKFI…..(followed by guff about eventual publication of details)”

Once again the government had absolutely no intention of answering a straightforward question of great public interest about an issue they are currently proposing to legislate on!

There was a similar refusal to give any figures in a question about the true level of the public sector debt, a refusal to provide any information about the bad debt figures for RBS and the due diligence findings, and a refusal to provide a timetable for the sale of Northern Rock which has been trailed in the media.

I asked why the government plans to buy more shares in Lloyds. This was the pathetic non answer:

“As a shareholder, the government has the option to take up part of the newly issued equity. (of course – it is a rights issue). If we did not do so, the value of the existing taxpayer shareholding would be diminished (if they did not do so their rights would be sold in nil paid form to someone else, and the taxpayer would receive a payment). To protect the value of our shares, we have therefore decided to take up our share of this new capital investing £5.7billion net of underwriting fee” (In other words hasn’t a clue why they are buying more shares)

They have killed the written Parliamentary Question.

The inflation increase was the largest since August 1990, when our economy was being distorted by following the German currency. RPIX (Retail Price Index without housing) stormed above the growth of the CPI (Consumer Price Index, Mr Brown’s preferred measure), hitting an annual increase of 1.9% compared to 1.3% a month earlier. The CPI itself returned to be the more muted of the two indices, rising from 1.1% to 1.5%. The RPI, still in negative territory thanks to mortgage costs, rose from -1.4% to -0.8%. When VAT and petrol goes up on top of this, expect more upwards momentum in the months ahead.

The inflation came from a wide range of items. Transport and fuels led the pack. Second hand car prices shot up. Air fares, DVDs, computer and other games and telephone charges all rose. So too did meat, vegetables, bread and cereals. It feels as if it is getting dearer out there, and it is. The public sector is still increasing its fees and charges. More rail fare increases are on the way. Commodity prices have been rising rapidly, and that will feed through, especially if the pound weakens again.

The Bank may want a little bit of inflation, and the government may want even more. They should be careful lest their wishes come true on a scale that embarrasses them both. It looks as if we are in for nasty rise in price increases across the turn of the year. That will come as no surprise to readers of this blog, or to students of the very lax monetary policy they have been following for months now.

In each of the last three years the Conservative group on Fulham and Hammersmith have cut their Council Tax by 3%. That means the tax is now down by almost 9% compared with their starting point. According to Labour this must lead to lower quality and less service. On the contrary, there are better services and a happier public. In 2006 the Council was average amongst London Boroughs in resident satisfaction. By 2009 they had leapt to 5th place.

So how did they do it? One good example is the Council newsletter. They inherited a forthnightly glossy magazine which cost £400,000 a year to taxpayers. They now have a fortnightly newspaper which costs taxpayers zero. They cut the costs of printing and production, and took in advertising to provide some revenue. No worse service. Big saving.

They cut the debt by £20 million, saving £1.7m a year in debt interest payments. They put £90 million of work out to tender to cut costs and improve efficiency. They have cut the number of people needed to deliver H and F Direct from 227 to 149. They are already saving £10 million on their IT budget through a new approach with their partner business, and aim to save more than the same again.

In dozens of individual areas they are showing you can do more for less. What they have been doing in tjhe last three years, many more parts of the public sector have to do in the next couple of years. The good news is you don’t have to undermine schools or damage care for the elderly to bring in big savings.

Stop press: Further Council Tax cut planned for next year, fourth in a row.

One of the things that is most bizarre about Nulabour spin is the way they tell the opposition about the traps they are digging for them. Today we learn that this will be the most political Queen’s speech ever. We are told that each Bill is chosen to smoke out the Tories. Strange that. I remember that was what we were told about the last Queen’s speech as well.

I have a message for Labour. How the Conservatives vote on each of these proposals is not going to make much difference to the opinion polls. Nor will it make any difference to the legislation, given the large majority Labour enjoys. Conservatives might as well oppose the Bills, as that is what an Opposition is for. They can do so with impunity, on the grounds that these are not serious measures, but just crude examples of party politics.

I’m old fashioned enough to think that a Queen’s speech should be for a government to announce new legislation it thinks is needed in the public interest. Sensible governments legislate only when necessary, and only when they think the legislation will make our lives better. I also think it was better when we were not told what was in the Queen’s speech before it was delivered. I now have to write my response to the Queen’s speech two days before I can hear it and debate it in Parliament. Once again Parliament is marginalised.

Let’s take the headline Bill, the one to give the Regulators powers to retrospectively remove bankers’ bonuses. Any politician facing a close election will be tempted to support, given the low public esteem towards bankers. Yet this Bill is just another political stunt.

The regulators we are told, armed with this power, will be able to stop excessive risk taking. They can already stop excessive risk taking if they can identify it. The problem in the last cycle was not lack of powers, but lack of ability to see that too many risks were being run. The modern regulator can order a bank to raise more capital or to lend less, through the controls it operates on cash and capital. It can also limit or ban certain products if they are thought to be unduly risky. My main argument against this latest Bill is I do not think it will work.

Many of us do find excessive bonus payments unacceptable. If the bank paying big bonuses is already in receipt of taxpayer subsidy, we say there should be no such bonuses for the higher paid. You do not need an Act of Parliament to stop such bonuses. Taxpayers own these banks, so as owners we can put in an appropriate remuneration policy. What’s stopping the government from doing this? Why does it do the opposite, and offer huge bonuses to executives in loss making banks?

If a bank reaches the point where it needs taxpayer support, owing to poor management and weak regulation, then at that point the government can insist on bonus cancellation as part of the deal to support the bank. Why didn’t they do this when they moved against RBS and Lloyds?

If a bank is able to pay high bonuses because it is very successful, or because its shareholders are happy to subsidise pay for their own reasons and the bank is not going to need taxpayer support, there is no need to intervene. As a general rule the high bonuses of the past have only been possible because there is too little bank competition, so the sooner the authorities get on and create some more competition the better. That will solve the problem.

Apologies mean more when you apologise for something you did. If Gordon Brown is in the mood to apologise, I suggest he apologises for the following:

1. Giving away so much power to the EU.
2. Failing to honour his promise to give us a vote on Lisbon.
3. Selling large quantities of our gold at the bottom of the market to buy Euros
4. Running up the largest ever public debt
5. Nationalising two banks and losing us a fortune in them
6. Requiring our troops to fight a war in Afghanistan without a proper political strategy
7. Undermining our Parliament by stifling proper questioning and debate
8. Lurching from boom to bust to attempted boom in his money policy
9. Blocking reform of our schools and hospitals
10. Failing to control our borders

The Conservative leadership has regularly warned the party not to be over confident or triumphalist about a possible victory in the forthcoming General Election. They have no need to worry on that score. I have spoken to a number of different associations recently, including my own. The mood is sombre, serious and concerned.

Don’t get me wrong. All the Conservatives I meet would love an election in three weeks time. All are impatient for change. They want an end to the present government and the present Parliament, which has failed us. Most members think the Conseravtives are likely to form the next government, either with an overall majority or because the Conservatives are the largest party. If it is a hung Parliament many will want David Cameron to become PM leading a minority administration, taking each vote as it comes with the other parties until they decide to force an election by defeating the government. The mood is not sombre because they fear another bad defeat. The mood is sombre because they think we might well win.

I can best describe the feelings by analogy. It is as if we, the parents, had returned from a tour of duty abroad to find that the 18 year old twins we had left in the UK home had wrecked the place. As we get back we discover that the carpets and decorations have been trashed by too many all night parties. The power no longer works properly, the electrics are damaged, the plumbing is blocked and the cooker is so dirty you would need a day to clean it before you could cook. Worse still we discover they have run up an enormous phone bill ringing friends in far away places for long chats, they have used our credit for the biggest off licence bills and take away bills you have ever seen. The credit cards have been well and truly flexed. We have to come home to work to pay off the debts, run up in our name but not with our authority. They are at war with the neighbours and the place is in disrepair.

That’s how we feel about the inheritance any new government will receive. So many fine British institutions have been damaged or run down by this government. We need reform in the schools and in the hospitals, on the roads and the railways, in the Post Offices and in the quangos, at the BBC and in the EU. The debts are on an unbelievable scale. We are now borrowing £1 for every £4 we spend. The state owns two massive banks and has done precious little to get them into shape or to cut their losses.We have inflation rising against a backdrop of the biggest fall in activity since the 1930s.

Conservatives are sombre because of the possible task ahead. They realise it might be time for the public to want us to serve again in government. They know it is going to be far from easy or comfortable to do so. Only a fool would welcome the challenge ahead. Only a democrat truly dedicated to public service would take it on.

On Friday a Shadow Minister came to a Conservative lunch for the Wokingham constituency. After his speech members closely questioned him on the EU, climate change, the Afghan war, the BBC and open primaries. The questions revealed a wish for reassurance. Members wanted to know that the new Conservative EU policy will include a strong pursuit of powers back from Brussels and a move towards greater self government. They wanted to know there is a better strategic view of the length and purpose of the Afghan war than the present government seems to have, with the emphasis on the wish to cut back on the fighting by British troops. They wanted to be told that a Conservative government would not cynically use climate change theory to put taxes up. They favour strong action to cut or remove the licence fee from the BBC. They were worried that open primaries will produce the wrong candidates and weaken local control. In other words, they were beginning to act as a party close to power, offering criticial comment on the tasks ahead. They offered supportive criticism to ensure their representatives understand the needs and the mood.

Several papers and comentators have noticed the very different path of public sector and private sector wages. Public sector pay is rising three times as quickly as private sector pay.

In the private sector many companies are cutting earnings, and in some cases cutting pay. Employees and managers have reached agreement that they would like to keep more jobs, and accept shorter hours or worse remuneration to do so. In competitive businesses, especially in cut throat manufacturing where the Chinese and other overseas competition is most intense, there is no choice but to cut costs. The UK is showing a new and necessary flexibility in the labour market. Sensible companies that have to cut employment costs do so fairly, making management shoulder their share of the pain as well as factory workers. Executive numbers are being slimmed and executives asked to accept less pay or no bonus, just as the shop floor is going through lean times.

The conduct of parts of the public sector is atogether different. Where the private sector is controlling cost, the public sector is adding it. Where the private sector reaches difficult agreements without strikes, the public sector is strike prone. Where most in a private company see the need to be reasonable to survive, some in the public sector go on expanding cost as if there is no problem.

Some in the public sector get it. We can cut the costs of running our offices and our services. In recent days I met the Leader of Windsor Unitary Council, who will be cutting their Council Tax next year. Another local Council has embarked on a cost reduction programme amongst the high level executive jobs that have built up over the years. Looking at the BBC’s long list of highly paid executives, there seemed to be plenty of scope to do something similar there to reduce the burden on the licence payer – and that list of highly paid jobs was far from comprehensive.

Public sector managers who are not starting on cost reduction and efficiency programmes are irresponsible. The day of reckoning cannot be that far away, given the huge sums that are being borrowed. If we are to avoid high interest rates and other signs of financial distress, we need to take prompt action to control costs. If the public sector would just match the performance of the private sector in keeping earnings and wage growth down, we will be able to keep more jobs and services.

Yesterday when I wrote about possible futures or the world economy many of you wrote back about the UK economy. I did not mention it specifically in my review, as it is an extreme case of an economy borrowing too much. You cannot solve a crisis brought on by borrowing too much by borrowing more. The UK’s experience is likely to be disappointing compared to the world average when it comes to inflation, output and efficiency in the months ahead, because the UK is pursuing extreme short term policies which leave it at risk. One day markets are likely to have their revenge, as they did in lesser crises of over borrowing in the 1970s.

On Tuesday I have agreed to talk to a brain storming session on what might happen next to the UK and global economies. With no Parliament to go to, and the opportunity to hear some interesting people on the same subject, I decided to accept.

I am now planning my talk. The idea appears to be based on scenario planning. We all accept that single forecasts of the future are prone to error. Instead we set out a range of possible outcomes, and then try to ascribe a probability to each. Here are four to try for size.

Scenario One: “We all live happily ever after”. This is the best case of the authorities. In it the US and the UK are miraculously transformed into nations of savers and exporters, whilst the Chinese, Germans and Japanese develop a passion for consuming and importing. The US and UK withdraw their monetary stimulus in perfect time, leaving quantitative easing behind them and then putting up interest rates sufficiently to prevent inflation but not so high that they choke off recovery. The benign forces of globalisation and digital technology resume their reign. The world grows again in a sustainable way. No, that was not a pig flying. We could be living through an extreme version of a normal boom/bust/boom cycle.

Scenario Two:” One bubble more”. As investors pile into gold and index linked securities, this is a popular view. In it the monetary excess evident today in China and India as well as in the US and UK spills over from asset prices and commodities into shop prices and wages. We have another flurry of fun, before the whole edifice comes crashing down again when the authorities lurch back to tight money and puritan attitudes to debt and spending.
Yet broken western banks currently are not able to pass on the high powered money to private sector lenders. Private sector wages are under tight control on both sides of the Atlantic. The probability of this happening in short order seems low.

Scenario Three “The US and the UK are the new Japans”. There are still gloomsters about arguing that we are in for a long period of deflation. After 1990 Japan had an industry of broken banks. It took them years to sort them out. The government attempted money printing and huge fiscal deficits, but nothing made much difference to no growth or low growth. No amount of quantitative easing could lift the price level. Persistent zero interest rates failed to solve the banking and credit crunch. Could the US and the UK find the same happened to them? After all they have had a similar over extended property boom, a similar collapse in banking credit, and are now following similar monetary policies? I suspect not. The Anglo Saxons do not have the same ageing population and the same drive to save as the Japanese. They are better at inflation.

Scenario Four “Markets force adjustments”. The remorseless rise of Asia, led by China continues. The Anglo Saxon economies find there are limits to how much they print and borrow. They enter a period of painful adjustment, with higher interest rates than they would like as they seek to sell their debt. They grow more slowly than their old trends, and are forced to divert more money from private and public spending into exporting and debt service. The world grows, but at a slower pace than prior to 2007. There are occasional country crises, marked by currency and or banking collapses.

I would be interested to hear how you see the future. If you have a better scenario than one of these, then I will borrow it.

At last I find something the Bank has said that I can agree with. Inflation on the CPI will rise sharply late this year and early next year, and will rise above the 2% target. Their fan chart shows they think it could even rise above 3%, causing them the headache of writing a letter again explaining why they have failed. A year ago inflation hit 5.2% compared to the 2% target. The Bank’s course on inflation has been erratic and poor.

They argue that inflation will the subside again later in 2010, and will tend to be around the 2% target thereafter. Let’s hope that’s right. This forecast assumes no more quantitative easing after the £200 billion, and no further major devaluation in the pound. The Bank reminds its readers that market rates imply Bank rate will rise to 1.1% by Q3 2010, to 1.6% by Q4, and to 3.2% by Q4 2011. It may need to go up by more than that if the forecast of a stable pound is to be met.

The Bank is less sure of foot when it comes to the deficit. The Governor in his oral remarks implied that excessive borrowing had to continue in order to sustain the public sector part of demand. His report says that the debt ratio will need to be stabilised. In a masterly understatement they say this “will require some combination of a reduction in government spending and a rise in taxation as a share of GDP.”! Stabilising the ratio means not letting the proportion of debt to our national income rise any more. That would require spending cuts and or tax increases on a scale none of us have ever seen. For my part I cannot see why they should imagine any tax increases would help. The UK is not undertaxed. It is overspending. Higher taxes on individual and company income could make the position worse, driving away business and enterprise. We need more private sector jobs, demand and investment, not less.

Latest wage pressures show the public sector problem. The private sector has decided on job sharing and lower wages as a response to the recession. The public sector continues to push up wages unaffected by the downturn. As a result public sector pay is rising by almost three times as much as private sector. The public sector has to do more for less in the core services, and less for a lot less in the marginal areas. The longer the UK delays making the adjustment to the deficit the more painful it will be and the greater the burden of debt interest we will face. The Governor is irresponsible to suggest recovery needs the current profligacy. Countries that are recovering more rapidly than the UK have lower deficits. Too high a deficit will adversely affect confidence and lead to substantial financing problems in the future. Curbing the deficit will aid recovery. Failing to do so could lead to another crisis.

The President dithers. His advisers are now arguing in public, with the Ambassador urging no more troops whislt his General seeks 40,000 more. None of this delay is good for morale. It makes the military position more precarious, and makes it far more difficult to retain or augment the loyalty of Afghans to the civilian government and the foreign troops, as people worry about the length and depth of the commitment.

So what are the main options the President must be weighing?

1. Major reinforcement, to pursue the old strategy of fighting to win and control more territory. This would need many more troops, and the commitment to long term garrisons in many places to seek to prevent the insurgency gaining numbers and ground. This is unlikely. Even the military hawks are now talking about concentrating the win and hold strategy on a limited number of strategic cities.

2. The surge, as sought by the General. 40,000 extra troops would be sent to seek to kill more insurgents and impress people with the force of the commitment, whilst the civilian power uses the breathing space to intensify its training and deployment of its own forces to take over. This now seems less likely, given the briefing coming from sources close to the Oval Office.

3. Steady state, allied to moving more of the current roops deployed into safer bases, and using them more for training the Afghan army and police, and for support operations when needed. This also seems unlikely, as people would ask where was the new thinking and the greater clarity over the mission which many are now seeking.

4. An explicit change of policy, stepping up training of the Afghans and announcing a timetable for withdrawal of most allied troops. The idea that the allies were fighting a war would be replaced by the allies seeking to support the Afghan government who would make their own choices about how to handle the insurgency.

5. A change of policy towards many new political initiatives. The aim would be to see if there is a series of political deals over development, security and local government which could be done in order to allow a reduction in foreign troop numbers and their role.

6. A decision to withdraw, saying that now Afghanistan has a new government they need to sort out what remains themselves. This is most unlikely to be attractive to the US.

A possible outcome is some increase in troop numbers but less than the 40,000, an increase in political and training activity, and some recognition that the commitment to Afghanistan will be time limited.