Floating exchange rates partly solved the problem, but the promotion of the UK as the ideal country for direct foreign investment was the real solution. Add English law and language plus unimpeded access to the EU, and the trading gap ceased to be a worry. But it is a concern now, and will continue to be so until the future EU/UK trading relationship is clarified.
As the governor of the BoE put it, we must rely on the kindness of strangers to cover that large and growing hole. Whatever else, the BoE will have to think about the exchange rate, as no one will hold sterling if they believe it will be devalued, or it is the currency of a declining 1970s style economy, adrift in a world of protectionist blocs.
The era of quantitative easing is probably coming to an end, as it has not worked. Even if central banks deny this, politicians cannot avoid the message of elections. But what happens when central banks return to normal behaviour? That is to say money priced to prioritise business opportunities and to encourage savings.
This will require interest rates to return to positive levels, which will take time and cause disruption. Fortunately, the hole in our savings needs has been filled by asset managers reinventing the investment company – that Victorian relic which enabled investors to take great gambles, but at low risk.
New lenders replace banks
Monetary policy requires central banks to supply retail banks with money and for these to lend this on to business. But Britain’s high street banks no longer have the skills or desire to undertake risky lending; they just prefer mortgage lending.
So quantitative easing failed because the central bank’s largesse ended up locked away in retail bank vaults. Others then stepped in to undertake these profitable activities.
Investment companies avoid the difficulties of illiquid assets, and changing asset allocation preferences by their closed-end nature; investors cannot panic out of their property or other fashionable investments. They can only sell investment company shares within the stockmarket. This change of investor demand causes the premiums and discounts shown in Table 1.
RDR and investment trusts
Hard times have benefited investment companies with efficient corporate structures compared with unit trusts and exchange-traded funds.
The number of advisory and wealth management firms using investment companies increased by 33 per cent to 1,638 in the second quarter of 2016. This is a record number of users, and nearly triples the number of firms using investment companies in the last quarter of 2014, just prior to the Retail Distribution Review.