In which an ex-central banker inadvertently explains what's wrong...

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John Gieve, opining in the Financial Times, manages to capture what's wrong in his headline:

Who is in charge of the British economy?

This is a revealing question since it assumes that Mr Gieve and his ilk were - indeed are - somehow "in charge" of the economy. Think for a second what we mean by "the economy" and the sheer hubris of this man's belief becomes apparent. The British economy consists of the choices made by nearly seventy million people and millions of business. It's the sales made by the corner shop, the decision we make about this year's holidays or whether to go to B&Q or IKEA.

Yet this ex-central banker, undaunted by the scorching of his feathers as he flies ever closer to the sun, says stuff like this:
 

...the UK is now pursuing three macroeconomic objectives – steady growth, low inflation, and a stable supply of credit – with three sets of policy instruments. In the long term, the goals are compatible. But in the medium term there may be trade-offs. A new framework should explain how and by whom those trade-offs will be made and how the three sets of policy tools will be combined to best effect.

Impressive stuff I'm sure you'll agree. But it's wrong and not just because it's barely comprehensible. It's wrong because only a deranged idiot would think he (or a claque of him and his pals) can run the economy. It is this outlook that is causing all the damage - this stupid belief that there are a set of levers in the Bank of England that if pulled in the correct order will usher in an era of growth, prosperity and prizes for all.

All the rest of us going about our lives buying, selling, sleeping, eating and dreaming, we didn't cause the problem. It was caused by people like John Gieve who, despite all the evidence, still believe they know better. They don't know better and no one is in charge of the economy (unless you're in North Korea).

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Has activist government and banking failed?

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Ben Bernanke addressed the world from Jackson Hole and, it seems, said precisely nothing at all of significance. Markets flittered, skitted and fluttered as the impact of this non-statement echoed round the trading floors and bourses of the world.

In effect, as the man in charged of the world's most important central bank, Bernanke admitted defeat:

"Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank," he said. 

This is interpreted as "over to you congress and president, stop already with your politics". But it's not really clear what - other than run up more debt - congress could do to stimulate the economy. And it's not exactly as if the markets are all that chipper about the prospect of ever more borrowing from governments!

It seems to me that the time of active central bank stimulus has passed - it may or may not have worked (right now the only thing for sure is that we've more inflation than we'd otherwise have) but doing more harvesting from the magic money tree is pointless and probably dangerous.

Perhaps the answer lies in politicians admitting defeat too. Smiling into the camera and saying something like - "there's not really very much we can do now other than get out of the way of business, enterprise and individual initiative - sorry but it's up to you guys now."

Followed by cutting taxes, scrapping restrictive laws on trade, freeing up markets in property, employment and energy and moving to shut down the emerging license regime in local government.

I think this would work. But whatever happens, we can't go on pretending that governments - singly or acting together - can 'save the world'. They can't. Only people can do that.

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The coming economic winter - quantitiative easing, inflation and the crashes that are yet to come...

An economic winter is coming.

There are two business columnists in the Sunday Telegraph who I always read – and who seem often to be describing a different world. Such is, I know, the stuff of economics and finance. For every economist saying one thing we can find you one – or even 364 – who disagrees. Such is the case with Liam Halligan, Chief Economist at Prosperity Capital Management and Tom Stevenson, Investment Director at Fidelity Investment Managers (the two columnists).

So when they say the same thing we should take notice. Here’s Liam:

“That’s why QE (quantitative easing) will be blamed for so much more than “unfair” currency devaluations and for imposing a “soft default” on America’s creditors. This crazy money-printing is going to be seen as the primary cause of western inflation, food riots and a commodity price spike.”

All pretty polemical and typical of the Halligan style. Instead we can have Tom’s more measured, investment-advice:

“This is the so-called “Bernanke put”, whereby investors believe that if the worst comes to the worst the Fed’s helicopter will simply drop a load more newly printed dollar bills to bail them out.”

All told pretty high falutin’ stuff – not for the likes of us peasants toiling at the computer face. And, like the proverbial boiling frog (which on this occasion has nothing to do with Denholme), we’re not going to notice until it’s too late. We’re not going to see how our Governments – in a deliberate act – have set on a course of creating inflation so as to reduce the real deficit. It won’t hurt.

Or as our friend Liam puts it:

“So, in other words, QE has benefitted some pretty formidable interest groups – insolvent banks, public sector unions and cowardly politicians.”

The one group who emphatically do not benefit from QE is that group containing people without large debts, people living on fixed incomes, those reliant on savings, pensioners…in fact most of the population.

And what is worse is that QE isn’t working.

Far worse than that, the short-term, selfish decision to protect banks and the public sector now threatens to see a return to managed trade, to protectionism and to the misery of international stagnation – even depression.

“The US last week stoked the simmering tensions by unveiling plans for another $600bn (£370bn) of quantitative easing (QE) on top of the $1.7 trillion already in place. The dollar crashed in what is being seen as the latest round of competitive devaluations, as nations seek to debase their currencies to help domestic industry.”

With this comes calls for limits on current account surplus (oh, to have one of those!) – limiting it by agreement – to 4% of GDP. Or at least calls from the US:

“Geithner last week sought to "reach a common understanding" with proposals that are likely be at the centre of discussions in Seoul. He raised the prospect of using current account targets as a way of reducing the imbalances, suggesting a 4pc of gross domestic product (GDP) benchmark. Under his plan, countries with persistent deficits would have to boost savings and those with lasting surpluses would have to cut export reliance.

Unsurprisingly, both China, with a 4.5pc surplus, and Germany, with a 5.1pc surplus, would have to take immediate action. In a damning riposte, Cui Tiankai, a Chinese deputy foreign minister, said the US plan harked back "to the days of planned economies".

It has become a strange world when the Chinese Deputy Foreign Minister is lecturing the US about the dangers of planned economies and managed trade.

At some point we have got to make the banks fess up – get them to lay out the extent of their liabilities on the table and let a few things die. So long as US and UK central banks protect their financial industry through QE – and it’s for the banks interests not ours, dear reader – we face the prospect of a new inflationary bubble in stocks, property, commodities or even tulips that will drive another economic crash.

An economic crash that will be accompanied by managed trade, protectionism, destabilising tax increases and untold suffering for poor people everywhere.

It may not be a good investment strategy not to fight the Fed. But it’s good politics – we should fight the Fed all the way to a world economy based on making, doing and trading things rather than on the fiction of central banker control. Those central bankers – urged on by the panjandrums of the public sector (who wish to protect their sinecures) – are favouring their friends at the expense of those who do that making, doing and trading. And this isn’t just bad economic policy, it’s just plain wrong.

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