The third place in the leadership election went to Ed Balls, who, last week, was appointed shadow Chancellor of the Exchequer by Ed Miliband for reasons largely beyond the latter’s control. Miliband had originally made Balls education shadow, keeping his rival away from the economics post he wanted and was suited to. The key political issue in the UK for the foreseeable future will, of course, be the economy and the impact of deficit reduction. Balls has wasted no time in making his views clear:
2011 is a critical year for Britain’s economy and public services, and the coming weeks and months will tell us whether David Cameron and George Osborne’s reckless gamble has worked. With no plan for jobs and growth, they have instead staked the whole future of the economy on one card – the fastest, deepest deficit reduction plan in Britain’s peacetime history.
... cuts that go too far and too fast
… Over the coming months, as the impact of the VAT rise, deep spending cuts and rising inflation starts to hit home, we will be able to gauge the true impact of the Tory economic plan, and see whether their gamble has worked.On the same day (22 January) the Financial Times (£) led with an ‘inflation up, interest rates to follow’ story which included the following quote:
“Why would you want to be a bondholder with bond yields so low and that sort of inflationary trend,” Bill Gross, who runs the world’s largest bond fund at Pimco, told the Financial Times. “If CPI continues above 3 per cent in the UK and 2 per cent in the US, then we are accepting negative real interest rates, and that is not an attractive investment.”Pimco nuances its views quite often. A year ago (when Labour was in office) Bill Gross said that UK gilts were "resting on a bed of nitro-glycerine" as a result of the nation's high debt levels. In April, Mr Gross reiterated that Britain remained on its list of "must avoid" countries with Greece. After the election in July their views seemed to have changed, when according to the Daily Telegraph:
One of the UK's fiercest economic critics has moderated its tone and even begun advising clients to start gambling on a recovery. Pimco, the world's second largest bond house, has reversed its aggressive stance against the UK gilts, saying: "We do not expect the UK to fail in meeting its commitments". For sophisticated investors, Pimco added: "We believe exposure to the UK in the credit default swap (CDS) market offers a valuable opportunity."
... Mr Amey [a Pimco executive vicepresident] said: "The Coalition has demonstrated its intent to tackle the deficit immediately and we think that is generally good news. "At the margin, the risk of a double-dip recession has decreased." However, he remained doubtful about the investment potential of UK gilts, saying: "Given the risk to the pound and ... upside risk to inflation, we think there is relatively less value in longer-term UK bonds."
...Much of the recovery has been driven by the Government's plans to attack the deficit. "UK sovereign debt risk will continue to be an issue as long as UK debt levels remain high," Mr Amey warned.So, what does Ed Balls think should be done about “rising inflation”, which he seems to think is a bad thing, and to secure the greater borrowing that Labour's deficit reduction plans imply – must interest rates go up? He could ask his brother at Pimco. After all, as the Sunday Times, Independent and Daily Telegraph pointed out last July:
...the bond house's European investment team is headed by Andrew Balls, brother of Labour leadership candidate Ed Balls.
ADDENDUM: More on the Balls brothers in my post on 27 March 2011.