Inflation targeting, or what Arsene Wenger and Mark Carney have in common


Matthew Robertson 1.36pm

  • May 2004: Arsène Wenger hailed as Arsenal go entire season undefeated to win the Premier League
  • December 2012: Arsène Wenger under increasing pressure as Arsenal lose to League Two side Bradford City in the Capital One Cup
  • October 1992: for the first time monetary policy in Britain would be based on an explicit target for inflation
  • December 2012: Mark Carney, the incoming Governor of the Bank of England, has suggested abandoning inflation targeting

"When the facts change, I change my mind". A quote that has long been attributed to the father of modern economics, John Maynard Keynes. It is a belief that policy should be implemented to tackle the world as it is today, not as it was yesterday.  

The position of an English football team and the comments of the Governor of the Bank of Canada may not seem interlinked but they do shed light on whether it is beneficial to adapt to changing circumstances or to maintain the current strategy in total belief that it is the correct way.

One of the great success stories of modern economics is the taming of inflation. As Mervyn King, the departing Governor of the Bank of England, stated in a speech in October:

"Over the previous twenty years (1972-1992) inflation had been the single biggest problem facing the UK economy, peaking at 27 per cent a year in 1975. Over the subsequent twenty years (1992-2012), inflation, as I mentioned earlier, would average only 2.1 per cent."

The key to this success was controlling inflationary expectations and the key to that was inflation targeting underpinned by an independent central bank. Exiting the European Exchange Rate Mechanism freed Britain to set their own monetary policy, which culminated in Bank of England independence in 1997.

A target would be set and it would be free of political interference. As long as the target over the long term was met, the expectation was anchored as any deviation would be expected to return to the anchor. This was the case for most of the past twenty years.

This policy was a reaction to the economic difficulties of the time and has been reproduced in many countries over the world. Inflation is well above expectation at the moment but inflation between 2.5 per cent and 5 per cent is low by historical standards and the reason is that the inflationary expectation is still around the 2 per cent mark.

The footballing philosophy of Arsène Wenger when he first arrived in England was equally as successful. His devotion to ‘pass and move’ football led to five trophies in six seasons as well as the first team in 116 years to go a league season unbeaten.

However, times have changed both for the economy and for English professional football. The financial crisis of 2007-2008 precipitated a new thinking in central banking theory. The Bank of England ignored concerns about inflation and reduced interest rates to almost zero per cent in an effort to enhance liquidity and reduce borrowing costs. The greater concern for the Bank at the time was economic output and preventing the economy stagnating into a long term liquidity trap. There were numerous inflationary concerns regarding world food prices at the time but the Bank, quite rightly, decided that the crisis needed urgent, unorthodox central banking. This was further reinforced by a period of quantitative easing where the Bank of England purchased financial assets from commercial banks to inject money into the economy.

In a speech on 23rd January, Mervyn King argued that pursuing a two per cent inflation rate target throughout the financial crisis, would have worsened the recession:

"To bring inflation down ‘would have meant driving down wages by creating a deeper recession, even higher unemployment and lasting damage to the job prospects of many young people."

The question now is whether inflation targeting should be abandoned for nominal GDP targets, something the new incoming Governor, Mark Carney, has suggested. A deeper question is whether the economic circumstances of the economy have altered significantly to warrant a change in approach.  Are the economic conditions so benign that there will be insufficient demand to produce growth without active interference from a central bank?

Central bankers will need to factor in these conditions along with inflationary expectations to assess which approach to take. The history of the 1970s suggests that active GDP targets don’t work but that might have been for a different time with contrasting conditions.

Whatever route is taken it raises the question of whether to change one’s mid when the facts change. The arrival of Roman Abramovich and latterly Sheikh Mansour altered the nature of English football completely. Chelsea and Manchester City have the ability to outbid and outspend any club to attract the best talent from around the globe. There is growing doubt as to whether Mr Wenger’s prudent approach of developing youngsters and buying affordable players can be successful in today’s Premier League. Despite constant criticism, Arsenal’s manager has remained dogmatic about what he considers the correct method.

Is this appropriate when the facts change? We shall see when Mark Carney takes over the helm in the summer.

By that time there may even be a trophy in that Arsenal cabinet.

Follow Matthew on Twitter @FlatFootTory

Will we blow the final whistle on irresponsible financing of sport?

Nik Darlington 9.12am

I got a shelf life of ten years, tops. My next contract’s gotta bring me the dollars that’ll last me and mine a long time. Shit, I’m out of this sport in five years. What’s my family gonna live on? Huh?

- Rod Tidwell, Jerry Maguire (1996)

We can ignore it, remain locked in romantic nostalgia for a more Corinthian age and be disappointed; or we can accept it for what it is and love it for what it gives.

Sport is not just a game. It can inspire hope from despair, as we have seen attempts at in Sri Lanka in recent years. It can make a lucky cadre of talented individuals very, very wealthy indeed (though even that is as old as sport itself - do you think W.G. Grace made his lucre as a physician?). It offers a comfortable, if short-lived, career for a much larger number of talented individuals. Rod Tidwell is right. What are you going to live on when your shelf life is up? You need to make money, fast.

It was the offer of £175,000 per week from big-spenders Manchester City that prompted Samir Nasri to leave a club, Arsenal, where he was successful and popular, and to turn down a club as big and successful as Manchester United.

And what feeds high wages, high transfers and high expectations? High finance. At the top, sport, and football especially, is becoming an offshoot of the financial markets.

Manchester United’s mooted stock market listing in Singapore is the latest such development. The plan is to raise $1 billion in a flotation, in order to stabilise the notoriously over-leveraged club. There were thoughts that the English champions would try an IPO in Hong Kong, but the canny Cantonese don’t allow listings from companies making a loss.

Football must sort out its debt problem. That is the view of a recent report into football governance by a committee of MPs. It is also the view of UEFA, whose Financial Fair Play regulations stipulate that European clubs must break even by 2012-13. There are signs that some clubs are tightening their belts, although few are confident that UEFA’s regulations can be met, let alone enforced.

Further mimicking the slippery world of finance, Manchester City are being investigated by UEFA for allegedly circumventing the Fair Play rules by over-valuing a £400 million sponsorship deal with Etihad, the state airline of Abu Dhabi, whose ruler is related to Sheikh Mansour, City’s owner.

One would have thought that responsible restraint in this age of austerity would be praised, but no, in football, emotions rule reason. The Times ran a leading article (£) earlier this week about Arsene Wenger, the under-fire manager of Arsenal. It is worth quoting at length:

Arsene Wenger, entering his sixteenth season as manager, has won more trophies for Arsenal than any previous boss… The flair of his footballers is admired around the world. By discovering young talent he has managed to keep Arsenal in the top four of the Premier League without running up a transfer bill the size of Greece’s sovereign debt. And all this while shepherding the club into a new stadium.

And Wenger’s reward? To be booed and pilloried by Arsenal supporters for not opening his wallet more profligately…and to find himself the target of media nutters suggesting that his future at Arsenal may be precarious.

…Wenger’s would be an odd strategy to mock at any time, let alone when his brand of living-within-your-means book-keeping is an example to all governments striving to cut spending without undermining the competitiveness of their economies.

David Dein, former vice-chairman of Arsenal and the man who brought Wenger to the club in 1996, has said today that fans must back him or risk losing him. And so they should. Wenger’s departure under these circumstances, having just had to sell two star players (Nasri and the club captain, Cesc Fabregas), would be a ridiculous message that sustainable management is unappreciated.

It is encouraging that Tony Fernandes, owner of AirAsia and the majority shareholder at newly promoted Queen’s Park Rangers, has said that he will not try to imitate the lavish injections of cash seen at the likes of Manchester City and Chelsea.

"I don’t believe you can run any venture - be it sport or a business - that isn’t profitable. I’m not saying it’s going to be profitable tomorrow, but that would be the ambition."

"I think football is a fantastic business if it’s run well. QPR is in a fantastic location and has huge potential to develop into something special."

It is a lofty ambition (excuse the pun), but three cheers to that, and let’s hope it lasts.

Follow Nik on Twitter @NikDarlington

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David Cameron pleads for Cesc Fabregas to stay at Arsenal - might Zapatero have too?

Nik Darlington 6.00am

The Prime Minister welcomed Jose Luis Zapatero, the Prime Minister of Spain, to Downing Street yesterday. The recent events in Norway were discussed. David Cameron said that both countries had been “victims of horrific acts of terrorism in the past” and that they will be offering every support possible.

Also high on the agenda would have been the ongoing crisis affecting the eurozone. Mr Cameron said Britain and Spain wanted to see “quick, bold and practical action” to ensure recovery and growth in Europe. David Cowan wrote here last week about the very real possibility that Spain, along with Portugal, Italy and Greece, will have to default outside the eurozone and revert to old currencies like the peso.

The subject of trade was also on the table and both leaders expressed their desire for bilateral trade to increase. According to Downing Street, it currently stands at more than £30 billion per year and there will be a trade summit this autumn between business leaders and policymakers.

However, there was one item of trade which as far as David Cameron was concerned was not up for negotiation.

Cesc Fabregas is one Spaniard that I hope will not be returning to Spain!

Fabregas (pictured above with Mr Zapatero and Mr Cameron) was attending Downing Street yesterday to celebrate the graduation of youngsters from the Street Leagues Football academy, of which he is a patron. The Arsenal captain is the subject of acrimonious negotiations between Spanish giants Barcelona, his home town, and London’s premier club, where he has played since he was 16.

David Cameron professes to be an Aston Villa fan but clearly for him in football as in politics, the national interest trumps tribal loyalties.

Moreover, considering the dire state of the Spanish economy, the 40 million or so euros that Fabregas might cost Barcelona could probably best be put to use at home rather than being exported to Britain. Throw the mischievous separatist sentiments of the Catalans into the mix, and the Castilian Zapatero might well have been gunning for Fabregas to stay in London too.

Follow Nik on Twitter @NikDarlington

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Stan Kroenke’s takeover of Arsenal is a huge opportunity for community ownership

Nik Darlington 9.10am

Another English football club is falling to a foreign owner. This week, American tycoon Stan Kroenke increased his shareholding to nearly two-thirds of Arsenal after buying out the stakes of Lady Nina Bracewell-Smith and Danny Fiszman (who sadly passed away on Wednesday).

Russian billionaire Alisher Usmanov is the main obstacle to Kroenke assuming full control of the club. Usmanov owns a 27 per cent stake but his lack of board level representation reduces his influence - this could be a bargaining chip in any decision to sell his shares.

Arsenal becomes the latest in a growing list of Premier League clubs to come under foreign ownership, joining Aston Villa, Birmingham City, Blackburn Rovers, Chelsea, Fulham, Liverpool, Manchester City, Manchester United and Sunderland.

Why does this matter? The Culture, Media and Sport Select Committee is currently undertaking an extensive investigation in football governance. As I reported in February, the committee’s remit is to “look at the case for strategic Government intervention and improved self-regulation and…consider models which involve supporters more in how clubs are run.” The Kroenke takeover of Arsenal presents an opportunity to put into practice a responsible supporter ownership model, which could provide a template for better football governance in general.

The Culture Secretary, Jeremy Hunt, has said, correctly, that a club owner’s nationality is unimportant. Foreign owners generously inject a lot of money into the English game and the Premier League in particular benefits as a result.

Mr Hunt is concerned, however, that foreign investors understand the social and cultural importance of football clubs and that supporters are kept involved. The Arsenal Supporters Trust, which owns 3 per cent of the club, is critical of Kroenke’s £731 million takeover bid, saying that “Arsenal is too important to be owned by any one person.” Their fears will have been driven in large part by the example of Manchester United since the Glazers took control, de-listed, and saddled the club with vast debts. The Green & Gold anti-Glazer campaign has turned the affair into a political football, with supporters from all over the country lobbying MPs in recent months.

Kroenke has indicated that supporter shareholders should continue to play an important role, however the Trust wants cast-iron declarations of faith and an assurance that the Arsenal Fanshare scheme will continue - 1,800 members have invested half a million pounds in only six months.

Coming from the United State, Stan Kroenke ought to be familiar with community ownership of sport teams. The NFL franchise, Green Bay Packers, famously is almost entirely owned by small-scale shareholders. The mutualised club has kept itself going sustainably and successfully year after year after year, winning this year’s Super Bowl. It is ‘big society’ sport in action and an inspirational model for others to follow. Look closer to home, too, and in Germany’s Bundesliga, no less than 51 per cent of a football club must be owned by small members. In Spain, the giants of Barcelona and Real Madrid are notionally run as a supporter democracy. Why shouldn’t something similar work in this country?

Stan Kroenke and Arsenal are faced with a number of scenarios. One, go the way of the Glazers and pull up the boardroom drawbridge. This is highly unlikely, not least because of the reaction to the Man Utd takeover and the Government’s current close interest in football governance and community ownership. Another scenario could be to follow the likes of Chelsea and Manchester City and go on a spending spree, driving up wage and transfer inflation and distorting the marketplace even further (would Andy Caroll have cost Liverpool a record £35 million if clubs were mutuals?). Kroenke is alleged to have offered Arsene Wenger a summer transfer fund of £40 million but I don’t expect the Arsenal manager to abandon his habit for fiscal conservatism.

The scenario I hope to see unfold is Kroenke to install himself as the majority owner and chairman but to increase the involvement of the Arsenal Supporters Trust - not just in an independent advisory capacity but with direct involvement in club management and decision-making, and permanent representation on the board. Arsenal should remain a listed company and the Fanshare scheme should be enlarged, with the long-term goal being to move towards the sort of community ownership model practised in Europe and elsewhere.

Arsenal is celebrated for being a responsible, sustainably run football club. For most of its history, it has been owned by only two families, the Bracewell-Smiths and the Hill-Woods. Few football clubs are as traditionally conservative in outlook. Even Arsenal’s playing style was historically derided as boring and unadventurous.

Nonetheless, their recent move from Highbury to an expensive and ambitious new stadium shows that the modern Arsenal is willing to take risks; and because of its tight-knit, prudent culture and history, Arsenal is a more suitable club for a community ownership experiment than the likes of Chelsea or Manchester City - hence the huge opportunity.

Arsenal started life in the nineteenth century as a supporter-owned mutual. In a way, then, the most radical step it could take now is really the most conservative. Over the past decade, Arsenal have set an example to the rest in refusing to spend irresponsibly, to concentrate on youth development and to prioritise attractive football. This is the club’s chance to set an even greater example to its peers, which could reverberate across the entire sport.

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