It has not taken the new governor of the Bank of England, Mark Carney, long to discover that the British economy is far less manageable than the Canadian one, which he was previously in charge of.
His much-trumpeted policy of forward guidance' a pledge to keep interest rates at their current 300-year lows at least until the unemployment rate dropped to 7% has fallen apart less than six months after it was unveiled.
When he unveiled the target, Carney thought that it was in no danger of being hit until at least 2017. Yet with the UK economy putting in a surprisingly strong recovery over the past year, the jobless rate has now fallen to 7.1%.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Forward guidance dictates that he should now be thinking about raising rates. But instead Carney is hunting for some other measure to use as an excuse for keeping rates low.
Latest Videos FromMoneyWeek
Rising productivity, even lower unemployment, or rising inflation, have all been put forward as potential replacement thresholds. Or perhaps Carney should consider replacing the unemployment target with something more esoteric.
David Moyes winning a trophy for Manchester United, say, or Ed Balls admitting the last Labour government messed up the economy, or Nigella Lawson rehiring her old maids something so unlikely that there is absolutely no chance of it ever happening and forcing the Bank to consider actually raising rates.
The fact is, forward guidance was always a sleight of hand. It was an attempt to persuade businesses and consumers that rates would stay very low for another three or four years and so they should go out and spend and invest when in fact no one, not even Carney, has any real idea how the economy will develop.
Of course, there is nothing wrong in principle with the idea of such a senior and influential figure as the governor of the Bank of England telling people where the economy is going and what they should plan for. It would just be a lot more helpful if he was more honest about it. Here are a few places he could start.
An honest policy
So, if you have a mortgage or have been borrowing money for a business, then you need to have a plan to deal with that when it happens because if you don't, you are going to be in a lot of trouble very quickly.
Next, rising house prices are a useful way of getting the economy out of the deep slump it fell in to in 2008 and 2009. They boost consumer spending, lift confidence, and they get the banks out of a hole, because most of their loans are tied to property. But they are a short-term fix at best.
Over the medium term, British housing is too expensive compared to what people earn. More debt and higher property prices can't sustain the economy forever, and if you have been using your house as a cash machine, then that too is going to cause problems in the long run.
Thirdly, the British government is still running a huge budget deficit, and the country runs a massive trade deficit as well. So long as the global capital markets are happy with it, that is fine. But if they change their mind, things can turn nasty very quickly. Just look at Turkey or Argentina for confirmation of that.
The currency collapses, and interest rates have to go up to eye-watering levels. It may never happen. But Britain is skating on some very thin ice and preparing yourself for what might happen if that ice ever cracks should be part of your planning as well.
Finally, the developed world is facing a rising challenge from new economies in Asia, South America and now Africa as well. Competition means the world is going to be a tougher place than it has been for three or four generations.
In the years running up to the financial crash we disguised that by taking on more and more debt to make up for stagnating incomes and now we are doing the same thing all over again.
Over the medium term, however, we can only meet that challenge by working harder and smarter and more productively. If we can't do that, we will have to accept that we will have lower living standards than we expected.
Guidance that means something
Carney might find this a much more effective way of managing the economy than coming up with another gimmick for persuading us rates will remain low when in reality he has no idea what will happen in the next couple of years.
