Friday, 23 September 2011
Britain is swimming against the tide
The feared double-dip recession is almost upon us. For weeks, stock markets around the world have signalled the impending downturn.
Is it just me, but I feel as if I missed the recovery. Unemployment remains high, real living standards are falling, and inflation is running at around 5 percent a year. If there has been any growth, I haven't noticed it.
US GDP data helps explain why so many of us feel as if this crisis continues to weigh so heavily upon us. The 2008 recession was deep, and despite a return to growth in 2009, the level of GDP has yet to attain the peak is achieved prior to the crisis. In other words, the US economy has not grown in real terms for over four years. The GDP numbers in Europe tell the same story; a steep decline in activity followed by an anaemic recovery. In real terms, European economies have stagnated.
Whereas the source of the last crisis was in North America, We have Europe to thank for the coming slowdown. The sovereign debt crisis has been profoundly destabilising. It has sent a shock wave of uncertainty around the world that now threatens both North America and Asia. Instability and vulnerability are stalking us. Firms fear to invest, and households are afraid to consume.
Unfortunately, we have learned little from the previous crisis. Banks, particularly the ones in Europe, continue to be the weak link in the global economy. They are poorly supervised, under capitalised and vulnerable to a sovereign debt default.
It is not just Eurozone debt and Frenchified banking practices that will drag the world down into another recession. Exchange rate misalignment continue to exacerbate global macroeconomic imbalances. China is still running huge current-account surplus. The US economy remains deeply uncompetitive.
Within Europe we have the same unequal relationship between Germany and the GIIPS. Germany produces exports and extends loans to southern Europeans through their banks in order to have the output sold. Germany accumulates assets that are unlikely to be fully repaid, while southern Europe drives around in Mercedes. In some capitals, there is renewed talk of fiscal stimulus. It is as if the crippling accumulation public debt was happening in a parallel universe and therefore have no implications for fiscal policy here on planet earth.
There is no learning curve at work here. Politicians are trundling out the same old failed policy options. Both the Bank of England and the Federal reserve are considering another round of quantitative easing. Greece remains on the edge of a catastrophic default, sucking up ever mounting loans from its European partners. The rest of Southern Europe threatens to follow Greece towards the abyss.
The coalition government is swimming against the tide. It has begun to seriously tackle the fiscal crisis. The coalition has already hiked taxes and has begun to pare back government expenditure. Unfortunately, we are encumbered with an inflationary central bank that threatens to derail the only viable strategy that can take us out of this mess.
The UK's fragile recovery strategy depends on reining in the inflationists that now occupy the Bank of England. If the Coalition needs to re-establish control over monetary policy. Otherwise, the economy will continue to stagnate and that overwhelming sense of gloom will haunt us for another four years.