Βι¶ΉΤΌΕΔ

It's like that old joke about Soviet propaganda - "The future is certain. It's the past that's so unpredictable."

We don't tend to get too excited about revisions to the GDP figures. But , even for the non-nerdy.

We had new data a few weeks showing the truly dire state of the construction industry. That was always going to make this a chunky revision. But that headline decline in GDP of 2.4% in the first three months of 2009 is even worse than expected - there hasn't been a larger fall in output since 1958.

New data on the service sector is partly to blame: it shows the sharpest quarterly decline in output on record.

There's plenty more in this mountain of new data, which basically shows the economy has been growing slower than we thought for most of the past two years.

A tiny revision to the growth figure for the second quarter of last year also means that the recession also started earlier than thought. Of course that has pyschological significance, but given that you're comparing zero growth to a decline of 0.1%, I wouldn't make too much of it by itself.

We may yet get a positive surprise when the first estimate for the second quarter comes out on 24 July. Indeed, the sheer scale of this decline in the first three months must make a sharp improvement more likely.

But if you thought that any recovery was resting on shaky foundations, you will see plenty of support for that view in today's news.

We like to say the UK consumer has been surprisingly resilient in this recession, yet today we learned that consumer spending in the first quarter suffered the sharpest fall in decades.

As I have said before, if that underlying weakness remains, it is quite possible that the recovery will peter out later in the year, as it did in 1981.

That note of caution about the recovery is the main message of today's news. But there is, I suppose, a bright side. If the economy is that much smaller than we thought, the amount of slack - or spare capacity - ought to be that much greater, and the chances of a rapid pick-up in inflation that much smaller.

Inflation hawks can sleep a little more soundly in their beds.

The government thinks that the economic situation is too uncertain to have a review of public spending priorities this side of the election.

It is getting rather difficult to find anyone who agrees.

You would expect the Conservatives to call for more detail on future cuts. The tougher things look under another Labour government, the less scary things look with them in power.

But today, the OECD also said that on how the government's "efficiency savings" in 2010-11 were going to be achieved. And, though I was on holiday last week, I'm pretty sure that Mervyn King repeated as well.

Politically, of course the government would rather not provide any more meat for the opposition than it has to. And economically, the outlook is indeed highly uncertain. But if you take seriously the idea of a Comprehensive Spending Review, the experts I've spoken to aren't convinced that the uncertain times are a good reason to delay.

When Gordon Brown launched the first such review in 1997, it was supposed to be about stepping back from all the ups and downs of the political and economic cycles, to think strategically about the long-term priorities for public spending.

Would it be helpful to be doing that kind of strategic thinking right now? The Conservatives are not the only ones who think that it would.

Regardless of what happens to the economy in the next couple of years, we know that a major fiscal tightening is on the cards over the course of the next parliament. Taking the PBR and the Budget together, the "headline" tightening already announced by the chancellor comes to nearly 6.5% of GDP by 2017-18, or Β£90bn/year in today's money.

In , the OECD says the government "could do considerably more to accelerate its programme of fiscal consolidation, dependent on how the economy evolves."

It also says that:

"[E]xperience in other countries suggests that a focus on expenditure cuts, rather than revenue raising, is associated with more successful consolidations, particularly when coupled with explicit expenditure rules, as it is more likely to result in lower interest rate spreads and instil confidence by signalling a strong commitment by the government to a robust fiscal consolidation. The delivery of the consolidation will require specifying the 'value for money' savings beyond 2011-12 in the upcoming Spending Review."

Or not so upcoming, as it turns out. But the OECD economists clearly think that spending control is where the budget-tightening action should be, coming out of this recession. That's because, in the past, tough spending control has tended to win most points from investors, and thus larger falls in long-term interest rates for every pound that is cut.

As the OECD readily admits, we don't know when we will come out of the recession, or how quickly. Is that a reason to delay thinking about cuts?

Lord Mandelson thinks so. that "any spending review now would be based on entirely speculative projections of what economic growth will be". Well, yes. But they always are. That's what economic forecasts are. Speculative. And, as we are learning, often wrong.

It is quite true that if the economy takes longer to recover than the government now expects, the outlook for spending would probably have to change as well. For one thing, borrowing could rise even further, and the government might find itself having to tighten more, for longer.

Robert Chote, the Director of the IFS, told me: "if you're not sure whether you're going to have to take a medicine for six or nine months, that's not a very good reason to delay starting to take it altogether".

Everyone accepts that the fiscal tightening we're looking at is a job for more than one parliament. (For its part, the OECD says that returning to a ceiling of 40% of GDP for public net debt "is unlikely to be feasible until beyond 2020.")

You might have to delay or to rejig the plans in light of developments - heaven knows, that's what the government has always done before. As Chancellor, Gordon Brown was infamous for fiddling with the spending plans, spending review or no spending review.

But for the IFS and other experts, none of this is a good reason to delay thinking about how government is going to be reshaped to fit a much smaller amount of cloth.

I'm not sure anyone in Westminster seriously ever expected a spending review before the election. But as I said at the start, I've been looking for solid economic reasons to delay. I haven't been able to find very many. Perhaps you can.

It's a meaty discussion of business, a radio show, a TV programme - and a lot of fun. That's what I discovered about The Bottom Line when I got the chance to stand in as guest-presenter this week.

The idea of filming a radio show in an intimate corner of Broadcasting House may come to seem like a quaint detour on the road to a truly multi-media future. But right now, I'd say the hybrid format helps build a rapport with the guests that you can't get by sitting them in a big TV studio.

It certainly attracts the big names: this week I had Stelios Haji-Ioannou, chairman of Easygroup Ltd and founder of Easyjet, Lord Digby Jones, the former director of the CBI, and Steve Ridgway, the chief executive of Virgin Atlantic Airways.

We talked about how the airline industry was managing the global economic crisis, the future of air travel, the impersonalisation of business (or "why we all need to learn to love automated check-ins"), and much else besides.

You may be particularly interested to hear what Lord Jones had to say about Sir Alan Sugar's entry into the government.

You'll remember that when Gordon Brown first became PM he talked about a "Government Of All the Talents". Digby Jones was an early Goat, coming into the government as minister for trade promotion. He left after less than 18 months, having expressed some dismay about the limitations of working in bureaucracies. He was especially taken aback by not being able to get rid of anybody.

What does he think about the star of the Apprentice following his lead? Well, let's just say, he thinks the prime minister has picked the wrong goat.

With or without pictures, I think you'll enjoy the show. There's even a version for World Service, and a podcast.

As the regular presenter - my esteemed predecessor, Evan Davis - likes to say: "good conversation costs less on The Bottom Line."

Whisper it softly, but there was the beginning of a grown-up debate about financial sector reform and public spending in Wednesday's .

When it comes to better regulating the banks, Robert Peston has flagged up the key points of difference between the chancellor's speech and governor of the Bank of England's, including the governor's pointed call for the Bank to have more powers to match its new responsibilities.

Mervyn King quoted an American economist saying: "[i]f some banks are thought to be too big to fail... then they are too big." Whereas the chancellor said in his speech that "the solution is not as simple, as some have suggested, as restricting the size of the banks."

It sounds like a pretty straightforward disagreement. And these two sophisticated men will not be surprised to see it written up that way. But as Robert notes, on this point the difference is one of tone more than of content.

The truth is that both are right. That is what makes this stuff so hard.

In effect, Mervyn King said in his speech that it was not sustainable to allow banks to grow big doing reckless things, all in the knowledge that if things get too tough, the government will bail them out. "Something must give."

He's right. But the chancellor is also right that there aren't any easy solutions.

If banks stay small, you might avoid the too-big-to-fail problem - most of the time. But you might also raise the chance of individual bank failures, by making each bank less capable of absorbing shocks for themselves. And if the past few years teaches anything, it is that if every bank has made the same mistake, they are all going to get bailed out by the government, regardless of how big they are, and regardless of the stern warnings politicians might have given out in the past. Governments don't let entire banking systems go to the wall.

Both the chancellor and the governor know this. They also know that how well different countries' banking systems have fared during this crisis seems to have had very little to do with the structure of banking regulation in place before the crunch.

Australia, Canada and Singapore have all come out of this rather well. Each came into it with entirely different regulatory set-ups, with the central bank playing a greater or lesser role than here in the UK.

There is much more to be said on this topic. Suffice to say here that this is a difficult and profoundly important debate which isn't going to be over any time soon. Given the recent history, I'd say it's no bad thing that it's being held in the open.

It's probably too much to hope for a grown-up exchange of views on public spending as well. Certainly we didn't get it in on Wednesday, as the prime minister once again banged the drum on Tory cuts - even at the cost of mis-describing the government's own plans for public investment in the years ahead.

He suggested that such investment would continue to rise until the London Olympics in 2012. Yet the Budget Red Book clearly shows capital spending starting to fall from next year. Downing Street later "clarified" the prime minister's remarks, suggesting that he was also including expenditure on the Olympics itself, and the proceeds of future asset sales, which have yet to be specified. Hmmm.

Darling had a pro forma attack on the opposition in his speech. He said that "to attempt to balance the books now, simply by cutting public spending across the board... would be sheer madness". To my knowledge, that's not exactly what her Majesty's Opposition has proposed, but you get the idea.

The most striking thing about the chancellor's speech was his refusal to enter into a debate - with his own party or with the Conservatives - over what would be cut or what would be saved.

"Given the uncertainties ahead," Darling said, "it would be a mistake to try now to set in stone detailed spending plans for individual departments five years ahead." As Nick Robinson was quick to point out, that's a message for Ed Balls as much as for George Osborne. For now, at least, the chancellor does not appear to want to enter the fray.

Mervyn King had his own comment on the budget in his speech, to the effect that the government needed to show clearly how public borrowing will come down in future. Famously, he has said that before, in his testimony to the Treasury Select Committee. But since then, we have had a Budget in which Alistair Darling probably thinks he provided just such a plan. Apparently the governor disagrees. But who knows, maybe one of these days they can have a grown-up debate about that as well.

Most countries would think long and hard before appointing a foreign citizen to a senior policy-making role. At the Bank of England, it is becoming something of a tradition.

We learned today that Adam Posen, a distinguished US macroeconomist, will replace Tim Besley on the MPC when his term expires at the end of August. By my count, Posen will be the third foreign-born economist to sit on the committee, and the second person to be appointed while resident abroad.

Funnily enough, Posen and I studied at Harvard together in the mid-1990s and kept in touch later when we were both working in Washington. The most important thing to know about him is he has a global perspective - more global, in fact, than his US-based predecessor, David Blanchflower.

An expert on monetary policy, Posen is a widely recognised authority on the Japanese experience since 1992, which can be no bad thing in the current climate.

His knowledge of Japan, and of the way in which a major banking crisis can hang over any economic recovery, may partly explain why he was an early and enthusiastic supporter of fiscal stimulus packages in the US and elsewhere.

It may also explain why he has warned of a W-shaped recovery in the US, and supported earlier, more comprehensive action to clean up bank balance sheets. As it happens, , co-authored by Posen, was published today.

He is an American, born and bred - he held great Super Bowl parties back in the day. But he has a long history of taking great interest in other countries: not only Japan but Germany and the Eurozone, which are deeply unfashionable subjects in the US.

He spent a few months at the Bank in 2006, but to my knowledge he has not shown much interest in the UK. Presumably that will change, but it is in sharp contrast with Blanchflower, who grew up in the UK and has spent much of his career, one way or another, thinking about the UK economy. The same is true of most of the rest of the MPC.

In line with the new rules, he says he will be moving to the UK to take up his post. Famously, Blanchflower did not, which many feared what make him out of touch about economic developments in the UK. Given that he was the lone voice on the committee calling for interest rate cuts long before anyone else, that complaint rings somewhat hollow today. A bit of distance from Threadneedle Street may be no bad thing for a member of the MPC.

Regardless, I suspect that Mervyn King will be pleased by the new addition. Adam Posen is a savvy academic who does not very readily suffer fools - nor I suspect, politicians. And he will need little persuading that the recovery needs to be handled with care.

If you've ever wondered how Britain's housing market crash compared with everyone else's, you might be interested in this brief survey of the global property scene I've just done for my colleagues at the World Service.

Today we had news that . But there are markets where property owners have done much worse.

The global crisis began in the US housing market - and that could still be where it has the most lasting effects. Back in 2006, house prices had not fallen nationwide since World War II. People didn't think it could happen. They think differently now.

By one estimate, America's housing wealth has fallen by $5.6 trillion dollars since then. It is now lower, as a share of national income, than at any time since records began in 1952. That same Bank of England study cites research suggesting that one in six US households with a mortgage was in negative equity at the end of 2008 - more than in the UK.

But America's market has not seen the most dramatic plunge in prices. That honour belongs to Latvia and Dubai, which both had even giddier house price bubbles than we did (though plenty of British buyers piled into the market in the case of Dubai).

According to the , Latvian prices have fallen 45% in nominal terms since the start of 2008, and they've fallen by more than a third in Dubai. That compares to roughly 20% falls in Britain and the US (though the market started to fall sooner there - overall, US prices have fallen by about 30% since mid-2006).

And it's not just falling house prices that are the problem. Spare a thought, as well, for the people who thought foreign currency mortgages offered a cheaper deal.

You have probably heard about the unlucky Brits who bought second homes in Spain or France with Euro mortgages. They are now being hit twice, once by falling house prices, and again by the collapse of the pound. But at least they are a small minority of British homeowners. Believe it or not, the majority of mortgages taken out in Hungary and Poland in recent years were denominated in Swiss francs.

They seemed like a cheap deal at the time. But the repayment costs have soared over the past year as their home currencies have fallen.

Has any housing market emerged unscathed? Well, if the great global property bubble passed you by, the chances are the crash has as well. A lot of Africa falls into that category - outside South Africa. Many East Asian markets have also done OK. But, for what it's worth, the Global Property Guide puts Israel on top - house prices there have actually gone up by more than 6% in the 12 months to March 2009.

In the UK, some encouraging data in the past month has many predicting that house prices are bottoming out. But the record number of unsold homes in the US suggests that prices there could continue to fall for a while. It should take even longer for people to see housing once more as a safe bet.

If this is a sign of things to come in the debate on public spending then we're in for a pretty miserable year.

There have been three key players in the spat over spending that's erupted in the last 24 hours: the NHS Confederation, the Conservative's shadow health secretary Andrew Lansley, and the prime minister. Each, to put it politely, has been highly judicious in their use of facts.

First came the NHS Confederation, with claiming that the NHS would face a "real terms cut in spending of Β£8-10bn" in the three years from 2011.

The figures are based on the IFS's judgment that the spending plans for 2011-14 that the chancellor announced in this year's budget probably meant an average cut of 2.3% a year in real terms for most departments, given the likely rise in spending in debt interest and social security that the government couldn't do much about it.

On that basis, the report said the NHS should plan for a 2.5-3% real terms cut in spending for the three years from 2011. It said that would add up to a real terms cut of Β£8-10bn, which is perfectly true.

You can see why the NHS Confederation would want to scare both its members and the voters with that prospect: its members, to instil reasonable behaviour in future spending negotiations and the like; and the voters, to ensure that there is maximum pressure on politicians to scure a better outcome for the NHS.

And yet, everyone knows that the NHS is not like other departments. Yes, things will be a lot tougher after 2011, and the NHS needs to prepare for that along with everyone else. But it will get a much better deal than the rest.

If you wanted confirmation of that fact, you needed only hear - in what then became stage two in this latest spat.

If elected, Mr Lansley said the Conservatives would raise spending on health, schools and international aid (DFID) after 2011, but that would mean "a 10% reduction in the departmental expenditure limits for other departments" in the three years from 2011.

He added: "That's a very tough requirement indeed." But in fact, it's going to be even tougher than that.

According to the IFS, if you protect the NHS and DFID by simply freezing their budget in real terms, that implies a real cut, on average of about 10% over three years for every other department - including education. If you protect education as well, the average cut for everything else is even worse.

The Conservatives have since admitted that Mr Lansley misspoke. After 2011, the Conservatives have so far only committed to protect health and development from real cuts in spending.

But at least the opposition are talking in real terms. And they are admitting there will be cuts. The same cannot be said of the prime minister - who gave us stage three of the row in Prime Minister's Questions.

Predictably, he claimed the Conservatives - in the person of Andrew Lansley - had revealed plans for sweeping cuts in "vital services" after 2011. In contrast, he said, spending under Labour would rise in each of the next five years, then reeled off a list of big - and rising - numbers to back him up.

But there's a slight problem, as Robert Chote, the director of the , has pointed out. The numbers he used were the nominal totals for Total Managed Expenditure over the next five years. They always go up. or nearly always. In fact, the last time they fell was in 1947.

By that measure, Margaret Thatcher never cut spending. Nor did the IMF. In fact, spending in nominal terms hasn't fallen since Clement Attlee was prime minister.

It all makes for a jolly knockabout in Parliament. But I pity the poor voter who has to decide what any of it really means for them or their own public services in the difficult years for the budget that lie ahead.

UPDATE, 17:10: Just to clarify something that was implicit in this post, but not really spelt out. The nominal figures that the prime minister read out to the Commons today were actually new - we hadn't seen the figures for total managed expenditure from 2011-14, though we knew more or less what they were on the basis of Alistair Darling's budget numbers.

Given the Treasury's own forecasts for inflation and the IFS's forecasts for spending on social security and debt interest over the period, these new figures confirm that if you freeze the NHS and DFID budgets in real terms from 2011-2013, other spending will see a 10% cut in real terms.

That's what Andrew Lansley should have said to the Today programme this morning, had he not tripped up on the question of spending for education and whether it was protected.

The bottom line is that the government's own numbers imply a 10% real cut in spending on other departments between 2011 and 2013, if the NHS and DFID are protected.

Believe it or not, the Bank of England is worried about another stock market bubble. I'm exaggerating slightly, but that was one of the messages buried in , the Bank's deputy governor in charge of financial stability.

Before you conclude that Mr Tucker has lost his mind, hear out the argument. It's not crazy. In fact, it follows naturally from fears that the next global recovery could be as imbalanced as the one before (see my post of 29 May).

In his speech the deputy governor warned that it was still unclear whether the financial system would be able to generate enough credit to support a recovery. That's the familiar question mark hanging over the economic recovery - and it's an important one, despite out today.

But less well reported were his remarks on the longer term international risks to the recovery - in particular the pattern of international savings. It's worth quoting his warning in full:

"If the Asian economies were to continue to save at an extraordinary rate but the Western economies increase their saving, as over time we must, in order to repair national and sectoral balance sheets, longer-term risk-free rates could again fall in order to bring about the counterpart expansion in investment. And, although it may seem far-fetched right now, that could give an upward impetus to asset prices over the medium-term. We would need to be careful not to mistake any such future developments for a miracle improvement in underlying economic and financial conditions. Indeed, internationally, we need to learn lessons about brewing risks from medium-term imbalances."

In essence, this is the fear I raised in that earlier post. The big borrower countries need to save more coming out of this crisis. That implies that national saving in the big surplus countries - especially China - needs to fall. If that doesn't happen - and the fear is that it will not - we could see another "glut" of savings in the world economy, much of it in search of risk-free assets.

If the price of those assets gets bid up by all that saving looking for a safe home, the cost of long-term borrowing would go down again, which would usually be a recipe for stock prices and other assets to go up.

You might think that would be good news - and, of course, it would be, at least for governments whose debt those risk averse savers would be hoovering up. But, as Tucker highlights, it could also be a false dawn. Yes, it would show things were "back to normal". But, with apologies for repeating this yet again, where global imbalances are concerned, back to normal is exactly where we don't want to go. If it was unsustainable before the credit crunch it's even more unsustainable now.

As , the stock of dollar assets built up by the saver countries in the past - especially China - actually gives them an interest in preventing a return to past imbalances. If those foreign assets are going to keep their value, they need countries like Britain and the US to earn our way out of recession, by exporting, not borrow our way out on the back of record-low rates.

Why? Because debt is now so high in countries like the US, that a recovery is built on yet more borrowing - either by individuals, or more likely, governments - is likely to end in widespread defaults and/or inflation, which will cause enormous losses for the saver countries which lent them the money in the first place.

It's an intriguing conundrum. Even as policy makers worry that bond yields will rise too high this year to support the recovery - Paul Tucker is worried that they might not, in the end, rise far enough, as a result of a glut in global saving. It's an interesting time to be an economist.

The shadow chancellor has given to the Association of British Insurers - well, surprising to those of us who did not imagine he was a fan of Will Hutton.

I'll explain more in a minute. But, as an opener, Mr Osborne makes a fairly bald claim about the markets. He says that:

"the credit ratings agencies and international investors are looking beyond the election to a potential new Conservative government for reassurance that Britain will get its public finances under control."

There aren't any polls of international investors, so we can't know for sure. But every conversation I have with bankers and city analysts suggests that this is true. Investors read opinion polls, and right now, ironically, the expectation of a Labour defeat might well be making the Treasury's job a little easier by giving them breathing space they might not otherwise have had.

At least one senior civil servant I've spoken to believes that the pound and the government debt market have been helped by the fact that "the markets are expecting the Conservatives to get in and slash spending."

It makes for a nice line in a speech - Osborne goes on to say that "re-electing the incumbent government is now the risky choice". But it also puts enormous pressure on him to deliver a credible economic plan.

Does this speech have the makings of such a plan? Well, no and yes. Osborne has very little to say here about how he would meet the rating agencies' call for dramatic action on the budget, if he ever becomes chancellor. That's a pretty big hole.

But longer term, he does make the point that it's not just public borrowing that has to fall. For a more balanced recovery, private borrowing also has to fall and saving has to rise. That's where things get a little more interesting.

He has a list of ideas for boosting private savings, like abolishing the basic rate tax on savings income, which he's raised before. But perhaps most eye-popping, for those of us who've been around for a while, is the shadow chancellor's admission that Will Hutton was right all along.

You may remember that Will Hutton - now - wrote the 1995 best-seller which, for a time, was New Labour's bible on all the things that were wrong with the UK economy under the Conservatives.

The book's basic line, which its author has come back to lately, is that our economic system encourages short term rent-seeking and undervalues long-term investment in productive assets. It's fair to say that it received pretty short shrift from Conservatives at the time.

Now, after years of Conservatives promoting a largely "hands-off" attitude to investment, George Osborne seems to have decided that Hutton has a point.

He says that he's not talking about "picking winners and national champions". Heaven forfend - no-one would admit to that these days. But he wants "a long-term and more strategic attitude to investment in infrastructure, skills and new technologies".

How these exciting new investments - in a high speed rail network, for example, or a new electricity grid - will be paid for is left a bit vague ("the role of government would vary according to the investment").

But at the heart of all this, he says, will have to be a more long-termist financial system. For years, the Conservatives have defended the City against claims that it was too short-termist. Now the shadow chancellor admits that "the events of the last two years make the charge of short-termism harder to refute."

How do you make the City take a longer view? With difficulty, as I think even Will Hutton would admit.

Mr Osborne talks tough of reforming bankers' bonuses, as Robert Peston has noted today. He also wants to give institutional shareholders more power and, of course, to have better financial regulation. Doesn't everyone?

He also, in a very Huttonesque vein, talks of creating new institutions to invest in start-ups and entrepreneurs. Here too, there's an admission that that there are investments that the market isn't good at making.

Whether government-sponsored institutions are any better at making those investments, of course, is another matter - but I'm fairly sure that you could find speeches of Gordon Brown's, when he was shadow chancellor in the mid-1990s, saying similar things.

All in all, a rather surprising speech from the the shadow chancellor for anyone who's been listening to Conservatives talking about markets and the economy for for past 25 years. I would be interested to know what , one of the party's most ardent free marketeers, thinks of Osborne's speech. But who knows? Maybe the financial crisis has turned him into a fan of Will Hutton as well.

Here the rub. Mr Osborne can talk about long-termism all he likes - but whoever wins the next general election, the single most important priority facing the government will be very short-term: proving to the markets that they have a credible plan for putting borrowing on a stable path. The international investors who set the price of government debt and the pound are not known for their patience, and I suspect they never will be.

Why is the pound rising? Because it went down before. Why might it go down in the future? Because it is rising now.

You may find that a somewhat vacuous explanation for - which hit a seven-month high against the dollar and the yen earlier today and has also gained ground on the euro. But there is an argument buried in the banality. Also some good news for the UK.

Think back to the last three months of 2008, when the pound was falling like a stone. At that time the fear was that the world financial system might be falling off a cliff, leading to Japanese-style deflation for much of the world and/or a repeat of the Great Depression.

If you're an international investor facing that kind of economic storm, the chances are you're going to be reluctant to store your money in the UK. As we now know, the growth of the City made us acutely vulnerable to a crisis in the banking system. And with our high levels of debt, the economy would also suffer more than most from a bout of falling prices - by raising the real value of that debt, it would make the burden of that debt even greater than it already is.

Against that backdrop, investors needed plenty of persuading to invest in the UK. In other words, sterling assets have to offer something extra in return. Typically that might come in the form of higher official interest rates. But if you remember, rates were being slashed at the end of last year as well.

The best hope for a decent return from sterling assets was a future rise in the value of the pound. And the best reason to expect the pound to rise was it had fallen so far it could surely only go up.

Welcome to the "overshooting" theory of exchange rates. (Or a version of it, anyway. Its author, Rudi Dornbusch, might not recognise it.) Currencies have to go down a lot for people to expect them to go up.

If you don't like that theory - I have others. Economists are fantastically good at explaining currency movements - they can give you at least four for any particular change. What they're bad at is predicting them. Academic studies have found that complex economic models for forecasting exchange rates are precisely as reliable as tossing a coin.

The basic point is that currency movements - like most things in the markets - tend to be more focused on where we are going than we are now.

When we were heading for financial armageddon, sterling looked a poor bet. Now things look calmer, the UK starts to look like a safer home for investors' money, for all the reasons it looked scary before.

That's especially true when data such as the today's Purchasing Managers' Index for the service sector - and - point to a slightly faster return to growth than previously thought.

If investors now think the recovery will come sooner - perhaps sooner than in continental Europe - they might also conclude that interest rates will rise more quickly as well. That is probably also raising the attractions of sterling right now.

One conclusion we can tentatively draw from Sterling's mini-surge. Investors right now are not much bothered about a return to high inflation in the UK. As , the recent rise in government bond yields suggests that inflation expectations are going back to normal levels. But there is little sign that investors expect inflation to take off.

If and when investors do start to worry about excess inflation in the UK - driven, perhaps, by concerns about the level of public debt - the pound could fall again. It depends
on what they expect to happen to interest rates in response. But yes, how far it could fall in the future will also depend on how far it's risen today.

Mervyn King said recently it could be six to nine months until we know whether quantitative easing has worked. You can see why. The lending figures from the first two months of the policy aren't exactly a shot in the arm.

Credit conditions have eased since the start of the year, and the Bank of England can take some credit for that - though more thanks to its interest rate cuts than its move to inject billions of pounds of money into the economy via QE. We saw another .

The Bank's purchases of corporate debt under QE also seem to have encouraged larger companies to put more debt on to the market. That was one of the Bank's stated goals when it kicked off the policy in early March.

But - and it's a fairly big but - a major focus of the policy has always been raising the broad money supply, or lending to companies and households across the economy, also known as M4. That was what distinguished QE from more traditional monetary policy.

By purchasing bonds (mainly government debt, or gilts) from non-bank institutions using fresh central bank money, the Bank of England was hoping to get more cash out into the economy directly, without entirely relying on the banks to lend it on. But growth in lending to households has barely changed in the past three months, growing at an annualised rate of around 2%. And by the same measure, lending to non-financial companies actually actually fell in April. Overall, the stock of M4 lending actually fell by Β£9bn in April, which I am told is by far the largest ever decline in a single month.

Now, there are plenty of explanations for all this. For one - we are in the depths of a recession. Even without a credit crunch, recessions don't tend to be associated with buoyant lending. The sharp decline in M4 lending (much of it traditional bank lending) might also be partly due to QE itself - if companies are using improved conditions in the markets to issue commercial paper and pay off expensive bank loans.

Bank officials would say there's been too much going on in the markets and the economy the past few months to be able to isolate the effects of QE - even Β£75bn-worth of it. The same applies to the rise in long-term interest rates during the past few months, primarily the interest rate - or yield - on government debt.

Other things equal, you would have expected that risk-free borrowing rate to fall as a result of QE, thus easing market conditions across the board. But, as I've discussed before, other things have not been equal. For one thing, there's been the small matter of the Budget and some pretty eye-watering deficit forecasts. Mervyn King seems to think things would have been worse for the bond market without QE, and probably for bank lending as well.

Still, it says something about the subdued state of our economy - and especially our financial system - that a cash injection worth more than 5% of GDP in just three months can sink, almost without trace.

For the true QE believers, such as Jamie Dannhauser at Lombard Street Research, the still weak state of corporate lending makes it even more important for the Bank to press ahead. If it wants to see broad money growing at 6-8% a year, he thinks it's a forgone conclusion that the Bank will use up its Β£150bn initial allotment for the policy, and it could spend much more than that by the end of the year.

That's quite a leap from just two months of data. But I don't think the members of the MPC when they start their meeting tomorrow will see reason to spend any less.