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Currency wars are the last thing we need now

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Trouble ahead: New BoE chief Mark Carney

The Bank of England’s inflation report today is expected to leave the door open to more QE, but the money printing medicine is not having the desired effects.

It has helped stoke inflation, which has been becalmed at 2.7 per cent for the past four months and is likely, the Bank will admit, to stay higher than target for up to two years, prolonging the pain for households.

With average incomes likely to grow by less than 2 per cent this year according to the CBI’s economic forecast, the squeeze on family budgets will hold back growth as people pare their spending.

QE has also been a factor in driving the pound lower, which ought to have been helpful.

Unfortunately, as the new Bank of England governor Mark Carney noted last week, the depreciation of sterling has not led to the textbook benefit of an improvement in exports, partly because other nations are trying to pull off the same trick.

Everyone is getting extremely het up about currency wars, or the threat of beggar-thy-neighbour tactics as nations try to gain an edge on exports through competitive devaluations.

This prompted the G7 to issue a statement yesterday aimed at calming fears, though it initially created further confusion.

The prospect of an outbreak of currency warfare has been stoked by Japan, where premier Shinzo Abe’s doctrine of ‘Abenomics’ – based on massive stimulus, a higher inflation target and pumping up exports through a lowering of the yen – have created ructions.

As the UK has discovered, a weaker currency might be a necessary condition for an export-led recovery but it is not sufficient, particularly when potential trading partners are struggling.

The worries may be overdone, but the G7 is right to take them seriously: mutually destructive currency wars are the last thing we need now.

Barclays’ capitalism

Antony Jenkins has set about improving the corporate culture at Barclays with zeal, so it is unfortunate that his attempts to draw a line under the scandals of the past have been complicated by the fresh spotlight on the bank’s Middle East capital-raisings in 2008.

As well as a probe by Britain’s Serious Fraud Office, the bank is being investigated by the Department of Justice and the SEC in the US over its Qatar dealings under the Foreign Corrupt Practices Act. This highly salient fact is relegated to page 99 (out of 103) of its results.

The bank says the probe had already been disclosed, and indeed it had: in the small print of its third-quarter figures in the autumn, where it was widely overlooked.

Given that Britain’s Serious Fraud Office is already investigating, and given the potential of US investigations to mushroom into costly episodes, this does not chime easily with a new, transparent culture.

Leaving aside the alley-cat ethics of the old regime, Jenkins will have to work very hard indeed to deliver better value to shareholders.

The bank’s shares, despite a recent rise, are still 60 per cent lower than in February 2007 and trade at a chunky discount to the value of its net assets.

Return on capital was minus 1.9 per cent, or 7.8 per cent if you add back all the nasties such as PPI and Libor costs, but even the latter figure is well below the cost of capital of around 11.5 per cent. Clearly, that is not a sustainable state of affairs.

Revenue growth is likely to be meagre, because of the weak global economy and because Jenkins is acting aggressively to reduce the amount of risky assets on the bank’s books. That can have the side-effect of hitting earnings. In short, shareholders will not see a return to anything even vaguely resembling the levels of profitability in the run up to the crisis, which rocketed up on the back of high leverage. The ‘New Normal’ will be much more muted.

Yet this bracing sobriety is not yet fully reflected in the bank’s bonuses, even though they have been trimmed.

Employees continue to be better rewarded than investors, dipping their beaks into a compensation pool of £1.85bn, more than twice the £733m paid out in dividends.

Bob Diamond liked to boast of his sympathies with the anti-capitalist protesters outside St Pauls, but it is not always realised what a kindred spirit he was.

Citizen Bob and his colleagues were keen practitioners of their own brand of anti-capitalism. Their manifesto was the enrichment of casino bank workers at the expense of the owners: Socialism, banker-style.

Jenkins is a different character. He deserves support in his attempt to rebuild Barclays, not least because the bank can play a major role in helping the economic recovery, but that backing cannot and should not be uncritical.

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