Dispatches from the G-20 Summit
The President and the Prime Minister have been scuppered by a 'King.'
Last week, the governor of the Bank of England, Mervyn King, an unelected and unaccountable public servant, intervened in the global political process set in train by the G20.
By doing so, he scuppered plans laid by Prime Minister Gordon Brown and President Obama to reflate the global economy. They planned to do this by ensuring that government spending filled the vacuum created by the collapse of private sector spending -- and to protect and create jobs.
Without this stimulus we can be certain that the global economy will continue to contract. The ILO predicts that job losses in 2009 will rise to 52 million, 38 million more than in 2008.
King is supported in his views by the European Central Bank, by Chancellor Angela Merkel and by President Nicholas Sarkozy. However, his intervention has been the most damaging to Anglo-American efforts to reflate the global economy.
King and many of his monetarist 'fellow travellers' are against injecting further liquidity -- money to you and me -- into the economy through stimulus.
The reason? That it will result in inflation.
Mervyn King has devoted his term of office as Bank of England governor in focusing narrowly on the issue of wage and consumer price inflation. At the same time he turned a blind eye to the role that 'easy money' played in fueling asset price inflation.
King warned of inflation as recently as last spring when temporarily a wall of speculative money inflated the price of commodities. His warnings led the British commentariat to spook themselves with 'frightmares' about the "spectre of inflation". The charge was led by the BBC's economics team with Hugh Pym warning in his News At 10 report (17th June 2008) that inflation was "haunting the economy...." . Michael Crick of the BBC's Newsnight piled on the horror that night, by flashing images of the strikes and inflation that brought down Callaghan's government during 1978's infamous "Winter of Discontent."
Predictably, the spectre of Germany's 'hyperinflation' of the 1930s was presented as an example of what might be in store if wages, salaries and consumer price inflation were not firmly held down.
Yet we know full well that today, less than a year later, the real threat is deflation.
The underlying collateral for both credit and prices -- property values -- continues to nosedive, driving the forces of deflation. Today the Standard and Poor's Case-Schiller Home Price Index was released, showing a record drop in home prices of 19% in the last year, with no turnaround in sight.
As credit dries up and crunches around the world, consumption is squeezed, exports collapse, firms are bankrupted and unemployment rises on a frightening scale.
These job losses that Brown and Obama were proposing to address through coordinated stimulus will in turn exacerbate the crisis of the finance sector. The unemployed will continue to default on mortgages and debts, will be unable to consume, and the result will be more corporate bankruptcies and bank failures. This will accelerate the downward spiral of falling wages and falling prices.
The consequences, therefore, of Governor Mervyn King's intervention will be played out for years to come -- in the destruction of banks, businesses, jobs and human lives.
Very few of us have lived through a debt-deflationary crisis, and none of us have lived through one so tightly synchronised by globalisation. It is a truly frightening prospect.
When the history books are written, it will be the governor of the Bank of England supported by the European Central Bank whose actions subverted the efforts of two democratically elected politicians at this weeks' G20 Summit.
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We can thank Brown's predecessor Tony Blair for making the Bank of England independent enough to sabotage Downing Street policy.
Anne Pettiror : "focusing narrowly on the issue of wage and consumer price inflation".
She forgets to tell us that this was the narrow remit the Governor of the Bank of England was given by this government, and has only now been modified to allow for deflation, or stagflation as we call it in the old days.
Everyone with intelligence knows that we cannot spend ourselves out of a recession, but Gordon Brown believes he can, and we have one of the weakest of the major economies in the world.
America has a "go gettum" attitude that comes out in adversity, and do not suffer fools in the White House as we do in our government, so the woes of the UK will be long and very painful.
Next year we get a new government but the debts of this government will take at least 7 years to overcome, since we also have billions of $ in PFI schemes which are not in the public accounts.
Our government has been doing this for 10years, almost the same poison into our system as the current crop of bankers have done.
You could not make it up.
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I regard myself as highly intelligent, Colin 111, and I regard John Maynard Keynes as a genius. He first showed - to a howl of opposition from conservative, classical economists - that it was both possible, and indeed virtuous for first the UK government and then the Roosevelt Administration to spend their economies out of recession.
That is exactly what Keynes prescribed in the 1930s. And that is what happened.
We must not forget that government expenditure is not like domestic expenditure. When government spends it gets a lot of money back - in the form of taxes and other income. Its called the multiplier effect.
Then let the govt give the money to the people of America equally and let us choose where to spend it. Sounds like a lot better multiplier effect than giving the a trillion to a few companies that ran their companies into the gorund and which no one even got fired. Maybe, the GM guy but with a 20 million pension.
The hyperinflation in Germany started in the 1920's and was caused almost entirely by the draconian terms of The Versailles Treatey agreed to by the "winners" of the First World War to punish the Germans. War retributions far exceeded the economic ability of post-war Germany.
In 1919 prices in Germany rose 50%, but by 1920 they were up about 500%. Between 1921 and 1922 the cost of living soared another 500%. The end came in 1923/1924 when prices rose about 14,000%. On August 30,1924 the new Reichmark was fixed at one trillion paper marks to one gold mark. This created the atmosphere for Hitler.
This is why I maintain the national debt of the United States will not be a burden on future taxpayers.
This is why the bankers and Wall Street fear the stimulus plans.
Poldolino has a valid point in that Europe's social structure is different than America's- they have national health care plans that are established as well as other social programs that are far superior to what exists in America. America would have to invest trillions of dollars to be on equal footing even if their Congress could come to some resolution of a plan equal of that of the European nations (which is highly unlikely.) Europe will come to the E-20 with a vastly different agenda than America. To think that every country will want or have the same goals is naive at best and dangerous at worst. Certainly up until now Europe has been among America's strongest allies however, this is a new world order and America had best watch out for herself.
My advice to Obama would be to be humble. The world's economies are choking because America sold them a poisonous white liquid marketed as milk. Entire countries are going bankrupt because of toxic American hedge funds sold by carnival hucksters masquerading as Wall St. international investment advisors. If the Iraq war didn't tarnish our reputation enough, this financial fiasco brings us lower than a junkie sleeping on the sidewalk. If I were Obama, the first thing I'd do is apologize, then I'd sit there quietly and listen. No one is in the mood for America's "leadership."
Let's not let Europe of the hook that easily. European banks were as involved with bankrolling AIG as any American bank. And European countries have allowed banks to become even bigger and a larger part of their GDP than American banks. Americans and our financial systems had the biggest role in this crisis, but you are incorrect to suggest European had no part.
European banks have indeed gotten into trouble. Overall European economies (but not all) are more balanced and a in better condition to survive this calamity than we are. Perhaps they are a bit reluctant to pursue as aggressive economic stimulus as we are but I think they also have a bit more leeway within to change their course if that is required.
Obama should tell them to behave or else he will unleash American kleptocracy on them just like he is doing it to Americans. ;-) Oh, I forgot only Americans will take that kind of nonsense. Most of the rest of the world knows better.
Obama is a likable guy and the world is looking for a change from the last eight years of misery just like we are. Obama is likely to charm everyone around but if those people had to live here they would find Obama a bit less charming. I think many Americans are already finding out that the true Obama does not seem to be on the same team with the majority of Americans. He is leaning too heavily in favor of Wall Street old power structures and to our detriment.
So the price of houses or real estate at the top of the bubble wasn't inflation? The Dow Jones at 14,000 wasn't inflation? The price of gas at over $4.00 a gallon wasn't inflation? These guys must think we are all idiots.
quote- "King warned of inflation as recently as last spring when temporarily a wall of speculative money inflated the price of commodities."
"King warned of inflation as recently as last spring when temporarily a wall of speculative money inflated the price of commodities."
When rich get multiples of what they got yesteryear there is no threat of inflation. On the other hand, when labor markets tighten and business must compete for labor this considered a direct threat of inflation. For the last three decades or so, each time that happened, we were told the economy was "overheating" and each time the Fed raised the interest rates to "cool" things off. Add to this the threat of offshoring, union busting and the threat from the undocumented labor you can see how the wages were deliberately suppressed for over thirty years..
Allow the capital to make obscene profits while depressing wages! After thirty years of this the American public has been systematically robbed. How did they accomplish this? The main culprit is clearly the Federal Reserve. We are now at the result stage of this systematic thievery. The main problem is general impoverishment of Americans. This process probably took between 1.5 and 2.0 trillion $$ out of American buying power.
Any policy pursued over a long period of time that consistently favors capital over labor is highly detrimental to the overall system. The current threat of deflation is the end result of that process. The system is on the death bed. Anyone thinking that all you have to do is to start lending money does not understand how the complex systems work and that includes the majority of our economists.
Indeed, those are not inflation. From http://en.wikipedia.org/wiki/Inflation:
"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time."
Did the price of bread and other commodities go up in line with the Dow Jones, houses and gas? Of course not. Then these were not due to inflation, but instead overvaluation. If it was really inflation, then gas would still be at $4.00 a gallon and not just over $2 (at least where I live) that it is today.
King belongs in the 1930's when central banks fought inflation way into the Great Depression,
Ann, you appear correct. 40 million world wide jobs will likely shrink over this year. Inflation is not the concern. Deflation will be around for a long while. As jobs shrink, the money supply slows down. Less money in circulation, more inventory sits on shelves, jobs shrink even further, and deflation persists.
http://eye-on-washington.blogspot.com
See Ann Pettifor's Profile
Thanks jerrypl. Great blog you've got there.
Central banks enabled and allowed this disaster and now they will do everything possible they perceive will help their main constituency - banks. To think these institutions work in public interest is naive at best. If you want real change you must change the very nature of central banks. Changing King or Bernake changes very little. Unfortunately those who own central banks also own most legislators and therefore without a sufficient impetus for change coming from elsewhere nothing changes. Those who own banks own central banks and through them they own us. These are profoundly undemocratic institutions - by their very nature they serve kleptocratic classes.
The Bank of England and the Federal Reserve are some of the criminal institutions which engineered this collapse. They should be held responsible and their management should be put under the control of elected officials. They are both responsible for creating inflation and deflation since they are the only ones who can print pounds and dollars.
If we presume that "some further hand-waving by a bank, state or otherwise," actually will obliterate all traces of 15+ years of securities fraud, then perhaps the argument could thence be carried that anyone who interferes or usurps the aforesaid hand-waving will thereby "torpedo it."
But I don't really think that the consequence of this securities-fraud can be wiped away so easily.
First of all, perhaps we all need to ruefully admit that we have been hoodwinked by a leprechaun, who played into our own greed as leprechauns always do.
Our balance sheets are awash with ZEROes... represented by "securities" that have no basis in real life. Such securities, of course, appear on the accountant's balance sheets on two sides... debit and credit... yet they belong to neither one. If twenty people in a hall-of-mirrors all have a document that says on its face that they have a $20 million "asset" represented all by the same (uncollectable) mortgage ... we are NOT looking at $400 million dollars! We don't have to cough up any money from anywhere to "buy" it. We need to be erasing zeroes, and seeing what actual assets might lie beneath.
I view "opening the floodgates of state-run liquidity" as merely pouring empty zeroes on top of empty zeroes. The state's "endless coffers" are leprechaun gold, too.
Since the Bank of England reports directly to Parliament and is owned by the state, I find it a bit curious to claim that it is unaccountable.
Really? Well, just look at the incompetent, perhaps corrupt CONGRESS of the USA and I think you should question accountability. There is NONE.
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Poldolino, again. When Gordon Brown became finance minister, he made the Bank of England independent of government.
However, you are right, it is a nationalised bank. But it is run by an unaccountable governor. In other words, he uses his position of power to oppose an elected government, and at the moment, he cannot be sacked without de-stabilising the financial system....so he is supremely unaccountable for his actions. Oh, and we can't throw him out at the next elections.
"Oh, and we can't throw him out at the next elections."
Well, if a party runs on a promise of getting rid of him, you probably could.
Do you really think that such officials should be under direct (party) political influence?
Well, I for one am glad to see a Bank of England Gov. being somewhat in line with the rest of Europe. For a change.
Two big differences between Europe and the USA:
1) On the whole there has not been a big property bubble in Europe. Where I live, in Austria, residential property prices have actually RISEN in recent months due to people transferring their savings from banks to real estate.
2) Europe's social welfare systems are already in place and they are reacting massively to the economic downturn, subsidizing short time, layoffs, etc. etc. - semi-automatically. So a lot of European countries do not need massive extraneous initiatives to stop a rise in unemployment rapidly feeding into mass poverty, homelessness etc.
Now it's not my job to understand these things and I can't say whether the US way of doing things in general is better or worse than the European way. But it ought to be pretty clear that it is not just pettiness on the part of Merkel, Sarkozy & co. to be proposing something different than Obama. Europe has a different situation and different interests and you can expect the major European leaders to be acting on the basis of intelligent expert advice. Just dismissing them as spoilsports doesn't really seem very bright.
"Vienna has felt like a changed place since the unmentionable words first began slipping off the tip of people's mouths -- terms like "crisis in Austria," and "impending government bankruptcy." The bad news seems to affect everything and everyone."
You may read the remainder of this article here, its very enlightening:
http://www.spiegel.de/international/europe/0,1518,612608,00.html
or maybe this:
Austria Default Risk Passes Italy’s as East Bet Sours (Update1) (Bloomberg News)
http://www.bloomberg.com/apps/news?pid=20601095&sid=av0_TxrNeFvg&refer=east_europe
Europe has the same interests as the US.. remain solvent, save jobs, revitalize their economies, restore trade, avoid having the weaker drag down everyone else. Its called globalization. Eastern Europe and Germany's recessions are dragging Austria into a deep recession since these are Austria' largest export markets (25%) and the banking industry have required bailouts due to their massive exposure to imploding eastern European economies. Merkel and Sarkozy are arguing philosophy while the realities require a different and pragmatic response.
All I wanted to say as a non-expert is that the real Austrian economy has not yet suffered vast damage, and that I think it is basically sound enough to come through whatever the storm brings in a relatively good position.
We do not have anything like the level of consumer indebtedness of the UK or the USA; we do not have the same level of home "ownership"; mortgages where they exist are much sounder. Of course we're heading for hard times. A fair amount of industrial capacity will be idle; in the automotive industry it already is. But even our automotive industry is much better positioned, thank goodness, than their US counterparts.
The Austrian banks, of course are having a game of bluff with the Germans as to whether their Eastern commitments are their own sorry problem or whether they just happen to be the providers of credit to the Eastern countries which Europe will simply have to sustain. The outcome is surely fairly predictable: the Germans will help, but they will want a stake in return, which is the story of the Austrian economy since EU accession anyway.
My personal feeling about all of this is, I grew up in Ireland in the 70s and 80s, so I know what a big recession feels like. Things seem a lot less crappy here now than they did there back then. And my inlaws have a big garden where I can grow vegetables, if necessary...
See Ann Pettifor's Profile
Poldolino, I am not dismissing Sarkozy and Merkel as spoilsports....I am simply saying that they are wrong to oppose a fiscal stimulus.
Here's why: government spending is not like personal spending, or even spending by a business. When a government spends on infrastructure, on insulating homes, on alternative energy - it gets a high proportion of the money back - in the form of taxes and other income - generated by employment and economic activity. So government spending when the private sector is on a spending strike - is not just a good thing, but a necessary thing.
Now Germany and France are spending a great deal, as you say - on welfare benefits. But that is a one-way spend, that gives nothing back. Its very, very expensive. Government debt rises, as expenditure on welfare rises; people are jobless; lose their homes, default on their debts, bankrupt banks - and the whole thing spirals downwards.....
That's my point.
Wait a minute. I'm not against spending, it's just that Europe in general does not need quite the same kind of EXTRA stimulus that the USA will need. There's a fair amount of Keynesianism, if you will, built into the normal way that most continental countries run their economies.
I don't know what they're doing in Germany but I do know that the Austrian govt. is already implementing a package of extra infrastructure spending. I can't judge whether this is big enough, but it's being done already - as a matter of course.
Spending on infrastructure obviously makes sense in countries like the UK and the USA where it is traditionally one step from falling apart. The need is much less acute in Germany or here. Welfare payments, if their level is properly pitched, will be spent almost completely, and may not always come dearer than producing things that aren't needed.
I think the debt default / homelessness part of your spiral will apply much less to countries where mortgage lending has always been pretty sound (there's no such thing as a mortgage here if you can't put up at least about 40% of the capital). Residential renting is highly regulated, large segments of the market are owned either by the state or by non-profit housing associations and quite possibly, rents will be forced down.
Savings deposits have already been guaranteed, which is potentially a pretty big intervention.
Recently I watched a man pump $400 worth of gasoline into a motorboat - not a ship, just a boat he had trailered to the bay. He probably burned it all that weekend.
Maybe that is the way the Europeans see us Americans - as very wasteful, squandering resources.
We can all tolerate a little inflation. But if we are going to engage in massive deficit spending we need to put the money in the right places, not just squander it. In the Southwest you can spend $40,000 and run your house on solar. See Amory Lovins and Rocky Mt. Institute.
that was my plan for THIS year, before my business flat-lined. Oh well
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