Wednesday, 19 October 2011

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.


Anonymous said...

"Sentient economists"?

Are there some that are not - and who do they work for Alice?

A bit of finger pointing is in order.

Back onto the point. You seem to be pointing to an underlying issue of of a DM/Euro exchange rate fix on one hand and a Yen/USD on the other.

Anonymous said...

I take issue with your statement that we don't have enough idle workers. Taking aside that as an unemployed person(not supposed to comment on this sort of blog I know)and that I am not a shirker, your statement that there are not enough of the right sort of people in the UK to make capitalism work is wrong. The policy, I speculate that it was adopted ad hoc, was to allow the entry of several million young, enthusiastic adventurists from all over the world. This has had a macro economic, political and social, effect. This was an excellent way to achive several things and it was only necessary to claim that to stop it was impractical or illegal. Firstly it increases competition between employees and serves to instil work discipline and keep down wages. You can forget the trade unions, but I'll mention that it reduces understanding, solidarity and trust. I shall not dwell on the social effects of this policy as this blog has a decidely 'economist' feel as Lenin would have said. This has no doubt staved off a much worse crisis of capitialism that would have occured without it. Essentially the whole culture of the nation would have had to be altered to reduce dependency and education tailored much more to competitiveness - OR something more socialist, national socialist essentially. As it is the idle millions of indigenes are very functional - they are cast iron labour voters, which incidentally the non white incomers are also. As I said, I dont think they thought this in advance but there was probably a eureka moment some time in the 90s. Similar processes took place regarding irish immigration in previous centuries. What is your experience of this reality I wonder? Do your eyes deceive you? Recently I was interviewed for a 20K job with Kuehne and Nagel in Birmingham. Of the 10 people there for the interview day 6 or 7 were from outside the UK. This is a MACRO effect. Now, go back to your Adam Smith altar and pray to increase you fatih in an 'abstract' non historical understanding of society.

Demetrius said...

I have already used the term "Merve the Swerve" in the past. Basically, he is like a surfer trying to ride too many boards on a tsunami. It may look interesting but it ain't going to work.

Anonymous said...

Time, you moron, will never "run out".

Vodka drinker said...

"Time, you moron, will never "run out"."

Only a pedant could point out something as literal as that.

Mr. King was being metaphorical, but substantive.

Electro-Kevin said...

A Chinese industrialist recently pointed to our welfare system and concluded that we cannot recover with it in place.

He's right.

It's why so many of our people are fat and useless and why we need to import people to do their work.