Mark Carney: time lord?

Is the bank of England Governor messing with the very fabric of time?

Time isn’t a very interesting idea to a physicist. There is the unchangeable past and the unpredictable future. “Now” isn’t a definable concept. It’s not even fixed – you can bend it. Time is a sort of illusionary bi-product spit out as the universe goes from a state of order to one of chaos. Why politicians and central bankers would want to start messing with it is a mystery.

Mark Carney, the Governor of the Bank of England, and the Monetary Policy Committee have been lured into the time game. They expect one of their trigger points, unemployment, to drop below 7 percent in 2016 at which point they’ll have a look at what they might - or might not do. In the world of the Bank of England this constitutes "delivering a measure of certainty". The previous governor, Sir Mervyn King, just used to say "I don’t know" when faced with demands for definiteness.

With unemployment currently at 7.8 per cent three years seems a long and unambitious timescale to set yourself such a meager target. Carney says that to achieve the 7 per cent unemployment rate a million jobs will have to be created – 750,000 new ones and 250,000 to compensate for planned reductions in public jobs and that is what will take the time.  Markets disagree and have pumped up their rate increase expectation to as early as next summer. Somebody is wrong.

Perversely, if you were Chancellor of the Exchequer, George Osborne, or a Conservative Party election campaign organizer, you might be pretty happy with the idea that unemployment wasn’t going to fall any time soon. The reason is simple – over the years the multiple of house prices to earnings has risen for about 3.5 to 6.5 for England as a whole (your main electoral battle ground) and the electorate has become twice as sensitive to interest rate movements today as they were twenty years ago (see graph). Get interest rate policy wrong and it could have electoral consequences.

By mapping where house prices are highest relative to earnings it’s easy to show that above average interest rate sensitivity lies almost exclusively in Conservative-held boundaries; the East, South East and South West (see second graph).  London is the exception but suffers the double whammy of being both the most leveraged part of the country AND dominated by Labour. You’ll get no votes from Londoners for increasing interest rates too soon.

Also the higher house price-to-earnings regions are associated with areas with higher salaries which already carry the highest level of taxation. Those earning up to £50,000 a year now have total deductions (National Insurance and Income Tax) of about 20 per cent whilst if you earn between £50,000 – 100,000 this rises to 32 per cent. In the £100,000 to 200,000 bracket your annual deductions bill averages 40 per cent of gross salary. By linking housing costs (i.e. an interest only mortgage) to where you are on the income scales it can be shown that for every 0.5 per cent interest rate increase could lead an equivalent of between 2 per cent and 4 per cent increase income tax. Increasing interest rates in that sense hits traditional Conservative voters harder than potential converts from the Liberal Democrats of even Labour.

None of this should come as a surprise to people but the extent of the apparent hyper-sensitivity of the electorate to interest movements is going to be more economically and politically important at the next general election than it has ever been before. The MPC will have to be doubly sure they have a self-sustaining economic cycle, embedded in a stable global background, before increasing interest rates. It may even be why they have set their earliest revue date to beyond the next general election. In that sense Mark Carney has been right to dampen the enthusiasm the markets have shown for marginally stronger UK data recently whilst if you were Conservative Party Chairman you would be praying that not too many jobs are created too quickly especially before the General Election in 2015.  

 

        

Source: HM Land Registry

                                 

Mark Carney. Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue