Time is running out

If, four years ago, Mervyn King had posted his recent speech to the Institute of Directors on a blog, he would have placed himself firmly on the outer fringes of the bubble doomsayers. At that time, there were a small number of bloggers who predicted the imminent collapse of the UK and US economies. For the most part, their dire predictions were not taken seriously. I know, I was there, and I have a large archive of blog posts to prove it.

The governor said some extraordinary things to the Institute. With remarkable candidness, he suggested that is is now time to accept that the "underlying problem is one of solvency not liquidity - solvency of banks and solvency of countries". Moreover, he acknowledged that the "underlying problems of excessive debt have not gone away."


Where did all this debt come from? According to King, the deep structural cause of the crisis lies in global imbalances. These imbalances have existed on two levels. Globally, Asian economies, in particular but not exclusively China, have kept their exchange rates low, exported cheap goods, earned huge quantities of dollars. This cash was recycled back to the US to buy government debt. This has allowed the US government to run up huge deficits. It also permitted US public to maintain consumption levels that could not be sustained by current US production.

On a European level, Germany has played the role of China, while southern Europe ran up huge external and fiscal deficits. The German private sector accumulated large cash balances that were sent southwards to keep Club Med spending. Other countries were in on the scam too, for example, the Netherlands, Finland and Sweden.

King is not wrong when he points to these global imbalances as the font of all our troubles. However, every sentient economist on the planet has known about these imbalances since at least 2005. The plain fact is that China likes the current arrangement. Germany, on the other hand, has begun to see the limits of running up huge surpluses and exporting capital to southern Europe. Still, surplus countries like China and Germany will continue to ride these global imbalances to the limit. There will be no "global consensus" to rebalance the World economy.

Herein lies the central problem for the Bank of England. It can do nothing reduce these imbalances. So, King has decided that the Bank of England should mimic the Chinese model. The Bank has already engaged in two massive rounds of monetary creation, and it is about to start another. The irony seems lost on King. He points to global imbalances yet uses UK monetary policy to depreciate sterling in an attempt to get into the game.

Sterling has lost perhaps a quarter of its purchasing power since the beginning of the crisis. Unfortunately, the devaluation has not resulted in a recovery. Exports picked up slightly, but the uptick barely registered in the GDP numbers. Inflation, on the other hand, has surged with remarkable violence. The headline rate is now running at 5.2 percent.

Why didn't quantitative easing work for us, when it worked like miracle-grow in China? It is not difficult to generate double digit growth when you have half a billion under-employed peasants toiling in the field and then take them into the cities to work in Ipad factories. The only spare labour capacity in the UK is the feral under-class that live in our major cities and thrive on a complex system of social benefits. Quantitative easing was never going to work in the UK.  We didn't have enough workers; although we have plenty of shirkers.

Half way through his speech, King told the Institute of Directors that "Time is running out" for the global economy. This is almost certainly true. Furthermore, it is a truly frightening statement. However, if the only answer to his alarmist and deeply depressing assessment of our economic predicament is printing money, then we are truly screwed. It won't save the UK economy and does nothing to reduce global imbalances.