Low and high expectations - for growth and the G20
Seoul, South Korea: Mervyn King has a very clear idea of what should happen at the G20 meeting in Seoul over the next two days. He's a lot less certain about what will happen in the UK.
But if the nine members of the MPC can't agree on the best path for the UK, I wonder whether it's fair to expect the G20 to agree on the best path for the world.
Watching the Bank of England quarterly press conference from my Seoul hotel room, I can say the governor's message to the G20 leaders came through loud and clear.
Time and again, he urged them to recognise their "shared interest" in agreeing a path for unwinding global imbalances. They didn't need to agree dates, or detailed exchange rate targets, he said, but there had to be a "collective recognition" that global imbalances are a pressing problem, and broad agreement on what the path of adjustment would be.
Such an agreement was possible, he suggested, and could produce a "win-win" for the global economy. But failure was also a possibility - and that would be a "lose-lose".
It sounds so simple. You'd think the G20 would be able to knock this off in a couple of days. It's not like they have much else to do here.
Except, they have already agreed that global imbalances are a problem. Many, many times. A "collective recognition" of the problem has been a staple of G20 and G8 Communiques since long before the crisis.
Indeed, at last month's meeting of G20 Finance ministers meeting in Korea last month, officials were falling over themselves to declare their common interest in finding a way through:
"....given the high interdependence among our countries in the global economic and financial system, uncoordinated responses will lead to worse outcomes for everyone. Our cooperation is essential. We are all committed to play our part in achieving strong, sustainable and balanced growth in a collaborative and coordinated way."
Everyone agrees on the "shared interest" in finding a solution to global imbalances. The disagreement is over how - and how quickly.
Part of the argument comes down to differing long-term growth strategies. For example, Germany measures its economic success by its exporting prowess. That is not going to change any time soon, even though German workers - and households - have not seen much benefit from that success in the past 10 years.
For China, it's not just about hanging on to an export-led growth strategy, it's about keeping control. China's leaders know the economy needs to change but - understandably - they fear the consequences of changing too fast - social and political.
But at the heart of the latest talk of "currency wars" is also a basic disagreement about the short-term macro-economic outlook, which Governor King will recognise from recent meetings of the MPC.
As in the Bank, it all comes down to how fast you think the US and other advanced economies can grow, in the wake of this crisis - and how much scope you see for policy makers to speed things up.
In effect, the ECB - and the senior German officials who were sounding off about the US this weekend - have an Andrew Sentance view of the world. They think the recovery we're seeing in Europe and the US is more or less the best on offer, for countries emerging from a major financial crisis.
On this view, further efforts to pump up activity - for example, with further quantitative easing - would be futile, at best. More likely, they will fuel inflation and/or unwelcome asset price bubbles and distortions (including, in the Fed's case, unwelcome swings in the value of the dollar.)
The US, it is fair to say, is rather more optimistic about the potential for growth. Indeed, there has been no formal recognition by the Administration or the Federal Reserve that US productive potential has been permanently hit at all by the crisis.
Nor is there much acceptance that the heavy burden of household and corporate debt will make this recovery slower than the recoveries of the past.
When you listen to Administration officials this week, remember that their official growth forecast for 2011 is still a gloom-defying 4%. And they are not just optimistic about potential growth; they're also optimistic about the central bank's capacity to bring it about. (Whether they would be so optimistic if it were not also the only policy tool available is a moot point.)
As I discussed at length in my last post, that is why they see looser US monetary policy as a win-win for the US and for the world - even if others fear it will be a lose-lose.
Like Adam Posen, in the MPC, Administration officials think the greatest risk facing the global recovery is not inflation, or distorted asset markets, but a tyranny of low expectations, where low estimates of potential growth become a self-fulfilling prophesy, and we all end up like Japan.
Perhaps thanks to the lively debates among Posen, Sentance, and the rest, the MPC has ended up somewhere between the two poles: moderately pessimistic about UK growth, but fairly optimistic about the Bank's capacity to force the pace, if necessary.
The Bank's average growth forecast for 2011 and 2012 of just over 2.5% looks optimistic to some (especially those who ignore the skewed distribution of risks, and focus only on the modal forecast of around 3%.)
But, as the Inflation Report acknowledges, this would be weaker than the second and third year of recent recoveries, and could still leave the economy with a significant amount of spare capacity and unemployment.
An interesting nugget from the report: if this recovery behaved like the recoveries of the 80s and early 90s, national output would be back to its pre-crisis peak by the middle of 2011. The Bank thinks there's only a one in three chance of that happening. On their forecast, there's even a chance it could be more than three years before we get back to that point.
However, the Bank's cautious and caveat-laden forecast for the UK looks positively upbeat when you compare it to the midpoint of the ECB's latest growth forecast for the euro area in 2011, which is just 1.4%.
Such is the pessimism about the euro area's potential growth rate, the ECB's economists think even this modest growth rate would make a dent on the region's spare capacity. There are no plans to loosen policy - far from it.
Expectations for this Summit are also pretty low. But if Mervyn King is right, the stakes could be very high indeed.
~RS~q~RS~~RS~z~RS~05~RS~)
I'm 
© MMXI
Comments
Sign in or register to comment.
Mervyn is right. And the stakes are high. The problem is what are they going to do? Up until now their tasks have been easy. Anybody can firefight. They look like they are doing something and no body can blame them for sitting back ignoring events.
Oh how they must be yearning for events.
'Fraid not. They are the event. At the moment anyway.
Complain about this comment
Mervyn The Counterfeiter, is sounding like the fox with no tail. Tell it to helicopter Ben, he will lend you a sympathetic ear.
Complain about this comment
Mervyn almost single handedly caused the crash - that was one he 'let slip' earlier.
Why on earth should we now think that he has any greater grasp of the situation?
Complain about this comment
Thing is, it's Merv's JOB to believe that monetary policy can work. In previous recession there was a lot less private debt, so their puny monetary policy might have worked eventually, but this recession is all about deleveraging.
This "Expansionary Fiscal Contraction" (oxymoron) rubbish will throw us back into recession within 2 years. More mass unemployment is inevitable, unless we have more targeted fiscal expansion of the money supply.
This would boost aggregate demand, and increase and improve imports (good for international relations).
Merv is, though, like a toddler in one of those little coin operated cars outside shops 20 years ago. They rock up-and-down and side-to-side, and the toddler enthusiasticly turns the steering wheel as if it is connected to anything.
At least he's got a job.
Complain about this comment
The MPC is well past its shelf life but it continues and demonstrate the fixation politicians and economists have with monetarism. As No. 4 rightly says will not deal with the unique features of this recession and the inherent instability of post free market capitalism.
Governments have outsourced and rendered simplistic economic management. Global corporations dont believe all the twaddle about monetarism and free markets - they are into planning and control and a bit collaboration all for the mutual betterment of bottom lines. MPC, BoE and QE2 will be seen as spectacularly irrelevant.
Complain about this comment
Good piece, thanks.
Corporate profits in the US have reached their pre-crisis peaks. High corporates are reaping the profits of central bank measures to kick the ball down the road.Taxpayers ( the middleclasses) know they will pick up the bills and the unemployed are blown in the wind. These contrasts will lead to strife.The spivs have been bailed out with no accountability. Forget about the impossible task of seeking to regulate sovereign outputs - it aint going to happen, Mr King.....I watched some of Mr Kings webcast - his big idea for global imbalances started to drown out the more important question about SMEs not being able to access credit on reasonable terms. Better he starts and ends with solving this problem IN THE UK...
Complain about this comment
Greataxepectations !
Collective wreckignition will turn the deflating monte carlo or bussssssssssst rouletteicians sitting on 1 0 u into a boomby bird ready to hit the fans of AAAirfarce one, its just a qeuestion of suffissioned sillycon to make themasses critiqeall of the carrotopian visionairyfairyss that have siphoned the banking cystem by taking the puss out of their induced volcanick erruptions as a bonus.
Now that the unemployed are about to work for £50 divided by 30 hours job placement or else ,the minimum wage can become a maximum wage .
The maximum wagees also referable to as "fee fi foe fum comission" being eggsclusively paid to those skilled in the art of operating the ponzi of ponzi rubric cube that disguises non eggistant wealth as the latest transparent fashion axessorry.
Complain about this comment
"Everyone agrees on the shared interest in finding a solution to global imbalances. The disagreement is over how - and how quickly."
You really think so, Stephanie?
That may apply to the net importing countries, but I think it is very doubtful that this can be said of the net exporters. The main "problem" country (China) doesn't actually give a fig about solving global imbalances. Exporting manufacted goods allows them to industrialise their country far faster than otherwise could. The Chinese subside their exports to the tune of some 70%. The Chinese population will never get anything back in return for these exports, but that is seen as being of no consequence. Longer term, the Chinese believe that once they are "fully industrialised" there will be virtually no goods and services that we produce in the West that they cannot produce themselves. They will have no interest in trade with us. Their concern is more in terms of bilateral trade with countries in Africa etc which can provide them with the food, fuel and raw materials (which are the only things which they believe they cannot produce internally).
As for the Germans, their problem is an almost religious belief in the "goodness" of individual saving, extrapolated on a national level to mean having an export surplus. It's a basic rule of economics that excessive savings may be in the long term interest of the individual/country doing the saving, but are very much against the interests of everyone else. But there's no evidence that the Germans will or can do anything to change this mind set.
The only answer is to impose tariffs on imports from countries that persist in having a trade surplus. You can even do that within a single currency like the Euro. If the Germans or Chinese try and relaliate, then as net exporters they are going to suffer a lot more than us.
Complain about this comment
Evening Stephanie,
thank you for your piece about Merv and ths G20.
As far as I can see all of these committees are of no use at all, we have the G8 which can't agree on anything so they refer it to the G20 for consideration and they can't agree either!
Isn't this just like the European Union where monetary policies cannot be correct for all 27 nations?
These talking shops achieve nothing (apart from a junket for financial commentators paid for by the taxpayer).
Real people in the real world are suffering and afraid of what comes next. They have done their best but will be sacrificed because of some political and economist ideal.
The G20 and the G8 should be abolished and the world returned to "everyman for himself" because that is what is really happening.
Bah Humbug!
Complain about this comment
As a country, we do not have enough demand in the economy. Not from ourselves, or other countries. No demand increase from Ireland, Spain, Portugal or Greece seems likely for obvious reasons. How far will their problems affect the rest of the Euro area. You choose a figure - it will be just as good a guess as mine or Mervyn King's. Can he see this storm coming? Europe's demand for our goods and services isn't likely to rescue our industry's output to the extent needed to absorb all tose jooining the growing dole queues. The other major storm is the US foreclosure crisis slowly burning in their courts.
There are also individuals seriously suggesting a return to the gold standard; I just hope George Osborne doesn't see this idea as a wizard wheeze! All the while our bankers and politicians concentrate on monetary measures and ask/expect us to increase our borrowing to support our economy. That particular sum just doesn't add up and won't happen. The other tool of fiscal policy, they all seem afraid to touch, but it is actually their best option for increasing demand and lowering unemployment.
Yes we have a deficit; I gather 80% of it we owe to ourselves via pension funds etc. So that money in interest payments is paying us the population. We spend some of it and invest the rest - its creating demand which is what we need. GO wants to cut these payments to the non-government sector - result is we then have less to spend and we have a reduced demand; I'm loosing GOs plot here or have I got my logic wrong.
Then we have QE which seems to me the UK government replacing bonds with an interest rate by new ones with a lower interest rate. Non-government sector again getting less, being squeezed and result is reduced demand. The rest of the money is going abroad to be invested there. Far better if our financiers did the right thing and invest £s from the government in the UK; afterall its the home of the £.
So have I got this totally wrong? I feel I've joined Alice and her blessed looking glass!
Complain about this comment
5. At 8:39pm on 10 Nov 2010, watriler wrote:
------------------------
Agreed, our financial institutions are becoming irrelevant; unable to get it right, but can get it wrong and spoil things. I suggest that industry is getting most of the cards and the people none at the moment - it makes me very uncomfortable for the future of our way of life and our security.
Complain about this comment
Great piece and penned with zest. Thanks
Complain about this comment
Blah blah blah blah and we were all very very drunk at the time.
ABC 1st album was very good at teaching economics.
Complain about this comment
Urereka!
The new international banking system should be built on the tungsten in cheque standard ,it cannot be counterfeited except with fools gold and fort knocks could carry on as if nothing had changed.
Coins could be stamped from it and worn as chainmail, also it could be used to resist rapid ak47 fire if used to brick up window openings to keep marauding cannibals out.
A one kilo gold plated tungsten coin would be ample to purchase a large pitza and it would be difficult to clip without removing its gold plating .
It could be used to line the pockets of banksters before dropping them into the Amarianaaacan trench with their well thumbed copies of Fractional Reserve banking for dummease.
Complain about this comment
Maybe they would get somewhere if M.King admitted that we have gained much of our wealth because we exploited the hard work of those in the East who were born into such poverty that working for peanuts to make stuff for us was seen as a better reward.
When the G20 sit together, the reality is that the West are wanting to continue to live at a level of prosperity that would require "6 earths" worth of resource if it was also obtained by the East.
What is so unfair about the standard of living of an uneducated low skilled (or non working) person in the West being similar to that of an equivalent person in the East? And also for the clever and skilled worker?
Has anyone ever heard a Western leader acknowledge that it is inevitable that the equalization of wealth between East and West will result in less for the West?
I thought it was interesting reading today about Twinnings tea moving a UK packing factory to Poland (making use of EU grant). I would be surprised if within 10 years there will be any need to do this, as there will be plenty of places in the N.E. and N.W. that will be as impoverished as Poland and just as cheap to employ labourers.
Complain about this comment
At least Mr King now admits that inflation is going to be way above target for the foreseeable future, that at least is a start. Reading between the lines though what he means is 'but don't expect interest rates to rise, because whatever happens to the cost of living I'm not putting them up'.
The BoE keeps on extending the horizon of its own definition of over target inflation. When exactly does a 'temporary blip' in inflation that goes on for several years cease to be a 'temporary blip'?
The high inflation we are seeing now is, in the main, as a result of the devaluation of sterling over the past few years feeding through into prices.
I'm worried about more QE in the future. The IMF says that the governments fiscal tightening will only work alongside more monetary loosening, in other words more QE. But the problem with QE as opposed to just cutting interest rates is the built in devaluation aspect which leads to high inflation that lasts for several years. This is fine if you are a bank or a homeowner as it helps bolster the value of your assets, but it does this at the cost of pushing those on fixed or even (not so) low incomes under a wave of continually rising costs that, for years, outstrip and overtake their wage rises.
There is a cost to society from QE, it is not the get out of jail free card that it is always made out to be. There is no such thing as a free lunch and in the case of QE it is those who don't own assets that take the hit so those that do can see the value of those assets continually rise. It can't go on like this forever...can it?
Complain about this comment
This comment was removed because the moderators found it broke the House Rules.
How will the Chinese keep out the broken AngloSaxon QE raw sewage system?
Complain about this comment
#8 >>The only answer is to impose tariffs on imports from countries that persist in having a trade surplus. You can even do that within a single currency like the Euro. If the Germans or Chinese try and relaliate, then as net exporters they are going to suffer a lot more than us.
Do you think the net exporters give a fig about any tariffs on goods that the importers are utterly incapable of making for any reasonable cost when compared to even the tariffed imports ??
Example - a piezo-electric ignition lighter (bog standard item, these days) leaves the factory gate at 10 Fen (approx. 1p). Applying a 100% tariff, the first buyer will have to pay 2p for it. On arrival in UK, it's sold for 50p because the UK is utterly incapable of making any lighters that cost less than £1 a piece !!
T-shirts ?? Just ask George at Asda what they pay for their T-shirts and what they are sold for !! Small computers ?? How many countries actually make small computers now ?? Flat-screen TVs ?? Microwave ovens, fridges, washing machines ??
Import tariffs are the last refuge of the incompetent when faced with issues that they either cannot solve or refuse to solve !!
The problem lies, not with the trade imbalance, but with the rapacious but bankrupt public who owe more than they can re-pay and still want to spend more ! Your very own statement proves this assertion that imports are still demanded even though the cost of the import is not !! Unfortunately, there are no more "damn natives" to loot any longer, so there are no more "free rides" !!
Complain about this comment
#15 What you've said is essentially correct but I beg to differ on your last paragraph.
"I would be surprised if within 10 years there will be any need to do this, as there will be plenty of places in the N.E. and N.W. that will be as impoverished as Poland and just as cheap to employ labourers."
While it may be true that there will be as much poverty in these areas, their labourers will *NOT* be as cheap as the Polish ones; quite simply because they will be better off being on the dole than actually working !! Keynsian Socialism strikes again !!
Fact : If there are so many jobs and yet there is so much "poverty", why aren't Brits taking those jobs current being taken by Eastern Europeans ?? After all, they have to travel a far, far longer way from home than Brits will ever do, in order to get these jobs !! Is there any "solution" to this "paradox" in the foreseeable future that is short of *Fortress GB* ??
Complain about this comment
19 ishkandar
'Unfortunately, there are no more "damn natives" to loot any longer, so there are no more "free rides" !!'
There are natives, natives of the British Isles, and they are being looted.
Most natives who are being looted only realise it afterwards. The pirates are in pinstripes these days. You can rob people more effectively with a fountain pen. I dont see many pending court do you. most appear to still be in place. No posse riding out looking for them.
Complain about this comment
#18 >>How will the Chinese keep out the broken AngloSaxon QE raw sewage system?
By raising the drawbridge on inward FDIs !!
http://www.chinadaily.com.cn/business/2010-10/12/content_11400947.htm
They didn't spend years of suffering to battle inflation only to be scuppered by inward flows of "hot money" !! It is believed that this move is targetted mainly at Americans trying to escape the inevitable fall in the US$ following the $600 billion QuEasing by "helicopter"(shouldn't that be more like the Titanic) Ben at the Fed !!
Complain about this comment
#21 So unfortunately true !! However, this "looting" will only be for the benefit of a few and not the general public !! "Rule Britannia" has become "Rue Britannia" !!
And Dave the Rave is not helping with his injudicious remarks enroute to the G20 meeting !! I said it before and I'll say it again - we now have 2 1/2 NuLabour Parties and God help Britain !!
Complain about this comment
Stop and think, the last thing we need is to perpetuate the current economic model. The current economic model is fatally flawed, anti sustainable, a crime against humanity, and must be changed.
By not costing natural resources:
1. we do not manage them: not measured, not managed.
2. cost benefit analysis is overwhelmingly biased to favour mining new rather than renewing renewables and recycling non-renewables.
3. economics accepts the well proven and widely accepted laws of supply and demand for all but natural resources.
4. satisfies short term greed and encourages the application of patches to attempt to address publicly perceived issues.
4.1 this is accentuated by public broadcasters worship of the economic model and failure to see 'sustainability' as the only sound method of activity rating.
5. subjugates any sound attempt at population planning.
Thus the man made construct of Economics is blatantly flawed, and is again and again, as with the patches, such as ETS, taking precedence over reality.
It is imperative for our species to survive our activities be sustainable; i.e. able to be done again. This requires activities comply with the Produce Use Sustainability Index (PUSI):
for an activity to be sustainable the time to Produce the natural resource must be less than or equal to the time for which we Use it.
Real economic reform is imperative. Our economic model must cost natural resourcessuch that renewables are renewed and non-renewables are recycled.
Our life support system dependent on the many parallel paths of biodiversity to provide biosphere resilience and stability. At our peril we continue to wipe out real natural resources in the name of a man made and fatally flawed ‘economics’.
Get the economics right and the rest will follow.
Complain about this comment
I'm getting a bit tired of Mervin King. He claims imbalances are important yet sat on top of a growing bubble and did nothing despite the fact a number of people said things were getting unhinged.
He is sure what somebody else should do but is unsure what he should do.
The further a problem is away the easier it is to say something should be done and particularly what somebody else should do.
The problem remains the overhang of debt and that was cultured here. It doesnt matter which way it goes, bankruptcy for the indebted or transitional support for the indebted the problem remains the debt and whichever route is taken there is a negative impact. In an economy which runs on credit you cannot truncate credit and expect no impact. In a global economy there is little uplift elsewhere to balance out downturns in an area.
Its not rocket science, why pretend it is.
As some UK sectors are continuing to decline and UK growth however small remains positive it is also entirely obvious that some UK sectors remain in growth. As those areas acheiving growth are doing in pretty difficult conditions it is also obvious they are highly likely to continue in growth. Until those areas currently in decline have bottomed out - which may take some time - then strong growth is unlikley to occur.
All that is happening is that those affected by decline are shouting vigorously to protect vested interest and demand subsidy. Whilst transitional support can be a good thing open ended subsidy which is often asked for is a very bad thing. The media simple is being used by people seeking subsidy to prop up their activity in decline. This is reported as though nothing else is possible.
It still beats me that anybody thinks this subject is rocket science. It's easy to make easy decisions and difficult to make difficult decisions. The difficult decisions were swerved so we are here. The problem therefore is the decisionmakers. By and large the decisionmakers appear to remain in place so it is hardly likely that they concentrate on historically bad decisonmaking, in preference they will point elsewhere.
The media continue to over-emphasis the day to day effect of events. This is on par with the media hyping up the idea of the US administration driving a potential folding of BP due to the oil slick. It was most unlikely that BP would be let go simply because they have to continue to exist otherwise the cleanup bill would not be covered. No creditor which was the US admin position would follow that route. I sometimes wonder if market traders are the ones who drive these media frenzies in order to drive prices down and make a profit. For sure if somebody is losing money then somebody is making money.
Complain about this comment
Stop and think, the currrent economic model is fatally flawed, anti sustainable, the ultimate crime against humanity, and must be changed..
By not costing natural resources:
1. we do not manage them: not measured, not managed.
2. cost benefit analysis is overwhelmingly biased to favour mining new rather than renewing renewables and recycling non-renewables.
3. economics accepts the well proven and widely accepted laws of supply and demand for all but natural resources.
4. satisfies short term greed and encourages the application of patches to attempt to address publicly perceived issues.
4.1 this is accentuated by public broadcasters worship of the economic model and failure to see 'sustainability' as the only sound method of activity rating.
5. subjugates any sound attempt at population planning.
Thus the man made construct of Economics is blatantly flawed, and is again and again, as with the patches, such as ETS, taking precedence over reality.
It is imperative for our species to survive our activities be sustainable; i.e. able to be done again. This requires activities comply with the Produce Use Sustainability Index (PUSI):
for an activity to be sustainable the time to Produce the natural resource must be less than or equal to the time for which we Use it.
Real economic reform is imperative. Our economic model must cost natural resourcessuch that renewables are renewed and non-renewables are recycled.
Our life support system dependent on the many parallel paths of biodiversity to provide biosphere resilience and stability. At our peril we continue to wipe out real natural resources in the name of a man made and fatally flawed ‘economics’.
Get the economics right and the rest will follow.
Complain about this comment
There has never been any sustainable logic in a World which pays someone more to unpack something in the UK than it costs to make it in China. This was bound to even itself out - and the only question was whether it would even-up or even-down.
It's a mathematical truth that it is easier to generate % growth from a low base in developing markets than a high base in a mature market. The west has masked this truth by borrowing for the last 30 years, but we have reached a point at which it re-asserts itself. In future developed economies will have to grow though innovation, making products to sell elsewhere (and so rebalance their economies). Even then this growth will be modest compared to the past - and compared to developing economies.
This does not mean that people in developed economies like the UK will inevitably get poorer. We can maintain our standard of living while others grow towards it, provided we make stuff that we can sell to them while they are selling their stuff to us. It's not so easy for the rich man to sell expensive stuff to poorer people - but that's the challenge.
At the moment, (the current visit to China aside) I see little evidence that this is the route that has been chosen. The ongoing attempts to reflate the consumer credit bubble: the erosion of real wages etc all suggest that we are going to impoverish ourselves in order to maintain the illusion of past (borrowed)wealth.
Complain about this comment
The current global growth model based on increased consumption is not sustainable. The developed World is up to their nose in debt and knows it. People there want to deleverage and not take on more debt. They quite understand there is a solvency issue they will be forced to address, sooner or later. The central banks in those countries want to coax and cajole citizens to spend more. The QE formula is flawed because it pushes down interest rates without addressing the problems of debt. If historically low Interest rates have so far failed to boost consumption, bringing them close to zero is unlikely to have an impact.
We live in an age where short sightedness is a virtue. Politicians can only see as far as the next election and are loathe to tackle the structural issues so necessary to pay down debt. Their quick fix is to get the state to take on more debt though right thinking citizens may object. Corporates are even more irresponsible and seem to be focussed more on quarterly earnings than on building a sustainable long term Business. Bankers of course are a class apart - "the World is there to rip off and our bonus is our right". Rather than being intermediaries between the sources of Funds and users of Funds they want to be mathematical geniuses designing algorithmic derivative models they will never understand.
We the citizens of this World are at the mercy of well heeled sharks, in sheep's clothing. We are being led like lambs to slaughter with a sugar coated spin that will put our grand mothers fairly tale skills to shame. My advise to fellow beings is please pay off all your debts and never ever borrow to finance consumption and lifestyle. Sooner of later the inflated Asset values that keep the wealthy in stratosphere will collapse and create the level playing field we so desire. Till then we must frustrate the efforts of Bankers to pauperise us Savers by keeping real Interest rates negative and convert us into Speculators.
Complain about this comment
The economic modelling and thinking used by the BOE is obviously not fit for purpose even though the institution has very capable individuals, including M King.
One of the BOE's problem is its relationship with HM Treasury ... and a new independent bank structure is requuired for the BOE. The BOE is held back by the politics of the day and is obviously restrained by the govt of the day.
More importantly the BOE's forecasting on inflation, growth, GDP appears to be based on the same bent HM Treasury 'short term good news' profile systems.
The UK urgently needs an 'NSI' ... a national sustainability index .. so that the UK govt and BOE is using best practice and is fully accountable to all UK citizens and taxpayers. All too late for Seoul.
What is the use of G20 if they all return home talking about 'growth' and 'GDP' ... we should all know that the phrase growth is meaningless as there is no proper current measure of 'growth' ... nationally, internationally or globally as ... in the medium term ... the world is heading for population and resource mayhem.
Complain about this comment
Part of the argument comes down to differing long-term growth strategies. For example, Germany measures its economic success by its exporting prowess. That is not going to change any time soon, even though German workers - and households - have not seen much benefit from that success in the past 10 years.
..................
Whoaaa!
The Germans are ahead of the UK on almost every economic measure.
Their clever and inherent protectionism as a high quality export machine economy is inbuilt in their mental attitude, constitution, admin and leagl systems, education systems, welfare systems and is reflected in e.g. their unemployment levels, crime, language abilities, teenage pregnancies, housing, living standards.
Their 'growth' is sustainable (subject only to commodity supplies) because of their entire economic structure, social and other systems are all geared towards a viable economic system which means they are e.g. by their nature 'covertly protectionist' and do not sell off their best national companies and national assets to the highest bidder.
That is why Germany will continue to grow is a sustainable way and Britain will continue to slide ... because the scale of economic and other reform that is needed in the UK to try and compete globally ... is too big for our politicians and would take 20 years to restructure even if our politicains knew what to do and started right now.
Most British people need to adjust their living standards substantially downwards in the coming years ... the vested interests with their fingers in our bank accounts and global pie ... will continue to prosper at our expense.
Let's put the differences between the UK and Germany in perspective please.
Complain about this comment
I don't understand this. With one side of their mouths the US and UK espouse competition, using it as justification for privatising public assets and forcing 3rd world countries to open borders. Yet apparently, when Germany produces something of value and doesn't cream off the profits by spending on useless tat, but instead invests in further growth... it's unfair. When British people prefer the foreign stuff to their own stuff, it's a big unfair conspiracy. "Stop being so good at making stuff, Germany, and start buying lower quality things from other people. Start wasting your money so we can be the exporters." If someone makes something better than you, it's capitalism in action: ie. tough, get to work and make something better or drop off the face of the planet. That's the idea, right?
We can argue whether the currency manipulations of the Chinese are 'fair', in that the government is taking actions to the detriment of the individual workers to increase competitiveness of the whole. that said as a collective group the workers there are forgoing luxury we take for granted in order to succeed. And for that we cry "no fair", yet it's the very model that we believe will make our lives rich and successful.
I don't agree with the capitalist model as the answer, but if you're going to wave the banner for it, you'd better suck up the rough with the smooth. Hoist with one's own petard.
Complain about this comment
29. At 08:57am on 11 Nov 2010, nautonier wrote:
'...the world is heading for population and resource mayhem.'
Spot on.
There seems to be a belief by economists that the credit crisis is the problem that needs solving. It isn't.
It is the dependance on exponential growth that is the problem.
Try looking at the big picture, we are facing a future within 3 or 4 generations of disease, drought, famine and war!
Attenborough agrees.
Complain about this comment
Reading through the majority of contributors above it now appears that the Bank of England and its Governor are well past their sell-by-date and need to be culled fro the sake of the Nation.
Moving on:
1. Do we need some organisations that performs the function of a Central Bank and a Regulator to prevent abuses of cartel and monopoly power in the financial markets?
2. If the answer is yes then what powers should the organisation have and how should its staff and management be selected. (Clearly the present system of selection and the criteria for selection have failed.)
It cannot be Merve is dead, long live Merve!
Ideas?
We will need to clearly set out the objectives of policy - such as:
is full employment a legitimate aim of financial policy, or;
how can growth be measured when it does not decrease unemployment and it is still called 'growth' (this encompasses the housing bubble question), or;
if we believe that monetary policy adjustment works as a moderator of inflation how do we need to ensure that never again can inflation be defined in such a way as to exclude the majority of asset price inflation?
My personal prejudices and analysis of the errors of the recent past do inevitably cloud my view - particularly as I spotted the cause of the crash nearly a decade ago (and corresponded with Mervyn King and his predecessor the late Eddie George on the matter), but others will have their own views I am sure!!!
Complain about this comment
31. At 09:30am on 11 Nov 2010, Dirty_Idea wrote:
"Start wasting your money so we can be the exporters."
I was wondering what the excuse fired at Germany would be.
We shout 'unfair' at China for being cheap...can't use that with Germany though, who are probably the world's best engineers.
Seriously, the UK and the US are starting to sound like toddlers in a playground.
'We've eaten all our sweets and it's NOT FAIR you still have yours...'
Complain about this comment
#20. Reply to #15. While it may be true that there will be as much poverty in these areas, their labourers will *NOT* be as cheap as the Polish ones; quite simply because they will be better off being on the dole than actually working !! Keynsian Socialism strikes again !!
My point was assuming that this will not be the situation in 10 years. We will have minimum support/benefits and any minimum wage will be far too low to be considered a liveable wage.
The reason? We are in a far worse situation than our leaders will admit publicly. There has been a lot made of £81 billion of announced cuts. Yet these are the total spread over 4 years. While at the same time we are borrowing an extra £150 billion just this year.
Anyone who is lowly educated and poorly skilled should be very afraid of what the future will bring. Just look at how the third world works... you have the rich in walled estates living at Western standards of living, with shanty towns just hundreds of yards away. It is completely inevitable that the UK will slide towards that direction. Within ten years I would expect that a terrace house in a poor area of Liverpool will cost up to a tenth of one in Cambridge, or the South East... as the UK splits apart socially and economically.
Complain about this comment
The BoE's role was and still is in part to operate government's monetary and exchange policy. In particular the Monetary Policy Committee MPC set interest rates (base rate) this rate determines mortgage and other interest rates throughout the economy. They look closely at future inflation and try to keep within the government's target of CPI 2% +/-1. This is something that they are not dealing with as they are looking at the bigger picture rather than getting on with the job in hand. Has their remit changed or have they decided themselves to take on a different role? By not acting to control inflation they are raising the question of if they are fit for purpose. For inflationary pressures have a detrimental effect on our economy much greater than is popularly known.
Complain about this comment
#30 Nautonier "Their 'growth' is sustainable (subject only to commodity supplies) because of their entire economic structure, social and other systems are all geared towards a viable economic system which means they are e.g. by their nature 'covertly protectionist' and do not sell off their best national companies and national assets to the highest bidder."
=================================
Entirely agree, the free market cannot effect a change to sustainability, it has to be deep rooted, planned and managed over generations. Where is the leadership for making this change for society? There is none. Serious problems require serious debate. Yet, the population is happy to while away the time watching X Factor and the Widdecombe sack of spuds. Nobody dare interrupt that. But for how much longer...?
Complain about this comment
Mervyn King really is sounding progressively desperate and powerless.
In recent months he advised the dangerously indebted UK citizen to spend more on credit, if they can get any, as an act of patriotism to get the economy moving again. This week he has finally admitting that his money printing is stoking inflation which is a growing worry. Food prices are going to rise again. Seems to me that people on low incomes will be worse hit.
So now his narrative is that China should ignore its own self interest so we can carry on living off the back of her peoples labour. China will eventually lets its exchange rate rise but not until it has achieved the domination that is inevitable. As they get richer perhaps they will allow their people more freedom.
As far as the UK and Mervyn King is concerned he had a chance to make a difference and missed it. He kept harping on that it is not the job of the BOE to control asset prices during the worst excesses of a property and credit bubble that he denied existed for years and hence encouraged. He reconfirmed many times that only the control of inflation is in his remit. Now we see he is not even any good at that.
I guess he was too busy doing economics to use common sense.
Complain about this comment
I think I mentioned a few years ago on this blog that my daughters A level geography text book ( written in 2005) highlighted the unsustainability of the trade imbalances between the developed economies of the west with the emerging bric economies through the recycling from east to west of cheap credit. So why is it that Merv the swerve has just started banging on about it does it mean that we would be better off employing geographers rather than economists as Governor of the BOE or is it that Merve is just following the US on this one ??
Complain about this comment
#33 JfH Whilst I'm not sure of your last paragraph, I fully agree with the rest of what you said. However, there is the problem of - who guards the guardians ??
Complain about this comment
I believe there is a fundamental misunderstanding amongst central banks, governments and investors of what this crisis is.
The web and computerisation are a paradigm shift in the organisation of economic activity.
Western elites are still wedded to the 'economies of scale' model because they do so well from it. But it's over. If it can be done on a computer it can be done anywhere in the world. Increasing computerised automation is moving the site of manufacturing to the domestic market. The edge given by low wages is diminishing to be replaced by transport costs, access to raw materials, and the costs and barriers to economic activity created by national legislation.
The inflation deflation debate shows a complete lack of understanding. This new paradigm drives down costs in the areas it impacts. Deflation is inevitable. The UKs austerity budget is a smokescreen behind which to print our way out of debt. Mervyn King made plain that he welcomes inflation. The US is desparate to follow the same course. Do the public realise we'll have to print a lot more money for a long time to inflate away our debts in a deflating world economy.
Developing technology is driving China to grow it's domestic market and service sector not western pressure.
This G20 currency wars nonsense is boring. US, UK and EU debt, personal and govt, paid for China's, Brazil's, India's and Russia's industrialisation and the creation of secure democracies in Eastern Europe. It was money well spent.
The creditor nations have some right to be angry at the extent of western bank collapses. But creating the illusion of growth amongst western democratic populations was deemed necessary to cover up and enable the transfer of capital and jobs to the BRIC's and Eastern Europe. Germany opted instead for maintaining it's manufacturing edge by keeping domestic demand low. But then they had the advantage of nationalistic justification in respect of Eastern Germany.
China will continue to buy USD, £ and Euros. There may be some disagreement on the balance between austerity and money printing, but of the need for both there is no doubt. Popular angst leading to protectionist tariffs will do nothing but harm. Rhetoric is not action.
Complain about this comment
#35 I believe is is a problem of "managing the expectations" of the population. In Africa it's very simple - you don't work, you don't eat !! Here, it's a lot more complex than that. How can we get a sustainable economy going without expectations of a First World standard of living whilst producing goods at a Third World rate ?? How can we sustain our life-style if wh don't have the means to pay for it ?? We tried borrowing and that's what got us into this mess, in the first place. Anyway, that's *NOT* a sustainable plan for the future !!
Growth is totally out of the question when unemployment is still rising !! The current figures on "growth" are illusions to placade the masses !!
Complain about this comment
JfH asked "how can growth be measured".
A more fundamental question might be, "why should 'growth' be measured?".
Everyone hangs on the latest GDP figures as evidence of this or that: but what is GDP other than an aggregate estimate of economic activity. Does anything really turn on it? (and to what extent is it influenced by 'hidden' factors such as inflation?)
In the real World a company "grows" when it sells more stuff, takes on more employees so that wages "grow": and they being consumers can "grow" consumer spending etc. As this goes on, so they pay more taxes - and so the Governments income "grows" and so can government spending: and, if you like, Government borrowing against income.
What more is there?
Complain about this comment
33 john_from_hendon
"is full employment a legitimate aim of financial policy, or;
how can growth be measured when it does not decrease unemployment and it is still called 'growth' (this encompasses the housing bubble question), or;
if we believe that monetary policy adjustment works as a moderator of inflation how do we need to ensure that never again can inflation be defined in such a way as to exclude the majority of asset price inflation?"
I agree that now is the time to discuss the role of the MPC, and their ability to have influence in these areas. I do not believe that monetary policy is actually capabale of controlling inflation, and hasn't been for some time. As evidence, according to Faisal Islam (Channel 4) only a net £8Billion has been added to incomes as a result of the reduction of interest rates to 0.5%. This is both insufficient by itself to control inflation, or to act as a stimulus for growth - therefore fiscal policy should be the main way of acheiving both.
You mentioned growth and inflation. I do not believe that all asset prices should be included in an inflation measure, though I do agree that those assets like Housing (which ordinary people rely on, and which helps to determine their wage expectations), should be included in CPI. Other primary asset prices like gold, copper etc should not, because in the main they have very little impact on retail prices. Only things which directly affect retail prices (plus housing costs) should be measured because they determine wage expectations.
Growth does lead to greater employment provided it is 'real' growth above the level of inflation as above. Even if the RATE of unemployment isn't reduced, real growth can occur as part-time workers get more hours. So looking at 'underutilisation of labour' is a better measure. It is wrong to believe that just because GDP is growing, but lower than inflation, that this is somehow adequate at reducing labour underutilisation - you seem to agree I think.
Full employment is not only a legitamate government policy, but correct according to international law, given that it is included in the UN Charter of which we are a member.
Kind Regards
Charlie
Complain about this comment
Is anybody still taking Mervin seriously? just waste of time. Is not he the same person who dodged the responsibility for credit crisis? Even about current problem he is not saying anything better/newer than the common people. Everybody knows what the problem is, and some got even ideas to fix it. Mervyn in is inept and useless. If the chancellor really wants to fix the economy he must sack Mervyn King first and get some fresh brains in the team.
Complain about this comment
The US, it is fair to say, is rather more optimistic about the potential for growth. Indeed, there has been no formal recognition by the Administration or the Federal Reserve that US productive potential has been permanently hit at all by the crisis.
Not sure how you came to this conclusion. If thats the case, why Helicopter Ben is still creating junk dollars? 600 billion of it, that is. And this may not be even final. There could be QE3, QE4, QE1000.... until US dollar is on par with Zimbabwe dollar. And as Mervyn "useless" King has no clue about the real economy and just follows Helicopter Ben (even to toilet i guess), British pound also will be on par with Zimbabwe Dollar. Thanks to Bernanke and King who knows only theory rather than any practical experience of economy, we all are going to be billionaires. Enjoy!
Complain about this comment
@Shireblogger
Spot on mate.
The corporate profits are breaking records with low turnover but big margin. The arith is so simple. They borrow at such a low rates and invest in higher interest paying countries (china, india, Brazil etc), and creating asset/commodity bubble. But Mervyn King will not talk about it, because he doesn't have the courage to accept any responsibility.
And about SME's access to credit at reasonable rate, it is his/BoE's responsibility to monitor what the banks are doing with cheap money lent to them by the state. But as usual Mervyn wont bother about it. He is good at giving (boring) lectures. Its a shame that our lives are decided by useless people like Mervyn King and Ben Bernanke.
Complain about this comment
Power with no responsibility whatsoever. As it stands, Mervyn is not accountable for anything and responsible for nothing. If Sterling becomes junk and Britain sinks in to great depression for next 500 years, even then Mervyn wont be held accountable for anything and nothing can be done. If at all, he got any self responsibility all he would say is "Sorry" (but i doubt even that) and write a letter to Chancellor Osborne (who is very happy not to take any responsibility himself). How many of you got this much of luxury? IS THIS DEMOCRACY?
Complain about this comment
View these comments in RSS