My Learning: Losing and again finding faith in economics

Why, despite my unorthodox forecasts “failing”, do I persist in my apostacies? Well, the fundamental cause of my “heresies” is being a member of a cult that has become ever more maligned and marginalised – by Savvas Savouri

A ‘pursued and persecuted’ group whose adherents are sought out by those “charting” their movements, seeking to convert them into better “technical ways”, or else. The cult in question adheres to the fundamentalism of economics.

As for my attachment to it, I was taught its rightful ways by the best of preachers. Yet, despite their efforts and my initial adherence, when I entered the city and finding few who shared my fundamentalist beliefs, my faith lapsed. With regard to my reawakening and reconnection, well, “my road to Damascus” began with two encounters with those who had formerly so persuasively preached to me; one meeting planned, the other pure by chance. Let me start with “the chance”.

It is May 1992, not long after a UK General Election which saw the shock of the Tories retaining power; in a win that would ultimately prove a very Major loss for the “winning” party. It is a pleasant Spring afternoon, and I am walking back to work through Broadgate Circle, to the then Dutch owned Investment Bank (IB) where I held the title of chief UK economist; in a team of one. Anyway, who do I see ahead of me walking towards the steps leading up to the Corney & Barrow (“Airport Lounge”), but an esteemed LSE Professor of Economics, who had taught me, would go on to win the Noble Prize, and with whom I had the honour of co-authoring a paper which had been published two years earlier in the journal Economic Policy.

Now aside from his duties at the LSE, the Professor in question provided economic consultancy at a US IB, far bigger than the one I worked at; both of which incidentally would fail at the time of the “GFC”, and to be clear long after our respective associations with them.

Though brief, our chat was very much on point. It was centred on Exchequer/Treasury/BoE efforts to keep the £ within the EMS; into which it had been planted against the wishes of many esteemed economic fundamentalists.

Now, rather than take in the wisdom of someone so very much wiser than me, I was full bloom hubris. After all, I held a PhD, had been published in The Economic Journal, and for a year, at barely 23, had lectured an MPhil course at Oxford.

I “MADE CLEAR” to the Professor that I was heading back to MY office to reiterate THE stance the £ would withstand all efforts to dislodge it from the ERM. To this the polite but very forthright response was “Sav, why are you denying fundamentals?”.

Well, deny I did all the way until the moment sterling was defenestrated out of the European Exchange Rate System, and I rued not heeding what I had been told on those hallowed steps of Broadgate Circle. It gets worse.

I mentioned that aside from the chance encounter with one former esteemed high preacher of economic fundamentalism, who I had denied, there had been a planned meeting with another. This had come in the run up to the Election of April ‘92 and involved a lunch with an LSE Professor who had become a Labour life peer, serving in the Lord’s as its authoritative shadow on economics.

Now during lunch, it was made clear to me that “on Labour winning the election”, it would announce the £ exiting the rigid Exchange Rate Mechanism, because its place within it was fundamentally flawed; denying the UK the ability to have interest rates set unilaterally.

So then, in 1992 I had two moments to rekindle my faith in economic fundamentalism; and I denied it both times. I often imagine where my standing would have risen to had I heeded of what I had heard from two wise souls. It really should go without saying that within a few years of my anus (sic) horribilis, I’d be fired.

Since my two failures and knowing that a third denial would be costly anathema, my loyalty to economic fundamentalism has been steadfast. Using this rightful gospel, I will preach this: YES, the HK$ will de-peg from the US$. It will do so because the fundamentals tell us it must, just not precisely when. And yes too, the £ will rise again, not only relative to the $ but also the €, because the fundamentals tell us it must.

As for some other fundamental beliefs there is the certainty that the US will descend into stagflation, and so too that the EZ is heading for a deflationary recession. Over in Asia, one can hold faith that China’s economy will perform well but give up on Japan. Also assured is that the IMF will again have to rue the downwards revisions in its forecasts for the UK economy. It has after all never understood the UK’s economic fundamentals. Indeed, the IMF has probably assigned the role of forecasting the UK to some hubristic 26-year-old with a PhD, and a highly inflated opinion of himself. Strangely, I sense I know him from a past life when I so sadly lost my belief in fundamentals; since when, praise be, it has be wholly restored, albeit mocked by believers in the delusional mysticism of “technical analysis”.Since my two failures and knowing that a third denial would be costly anathema, my loyalty to economic fundamentalism has been steadfast. Using this rightful gospel, I will preach this: YES, the HK$ will de-peg from the US$. It will do so because the fundamentals tell us it must, just not precisely when. And yes too, the £ will rise again, not only relative to the $ but also the €, because the fundamentals tell us it must.

As for some other fundamental beliefs there is the certainty that the US will descend into stagflation, and so too that the EZ is heading for a deflationary recession. Over in Asia, one can hold faith that China’s economy will perform well but give up on Japan. Also assured is that the IMF will again have to rue the downwards revisions in its forecasts for the UK economy. It has after all never understood the UK’s economic fundamentals. Indeed, the IMF has probably assigned the role of forecasting the UK to some hubristic 26-year-old with a PhD, and a highly inflated opinion of himself. Strangely, I sense I know him from a past life when I so sadly lost my belief in fundamentals; since when, praise be, it has be wholly restored, albeit mocked by believers in the delusional mysticism of “technical analysis”.