By Ambrose Evans-Pritchard – Telegraoh.co.uk March 8,2009
The Bank of England may have averted a catastrophe. If ever there was a time when this country needed its own monetary authorities – acting with wartime urgency – this is the moment.
Those nations with fossilised or timid central banks clinging to outdated ideologies are not so lucky. Even less lucky are those such as Spain and Ireland that have surrendered policy to a body that is deaf to their pleas and constitutionally obliged to ignore the welfare of their particular societies. They face crucifixion.
Spain's agony is already well advanced. Industrial output has fallen 24pc. Some 352,000 people have lost their jobs in two months. BBVA expects unemployment to reach 20pc next year, touching 4.5m. Premier Jose Luis Zapatero can do nothing as long as Spain remains in monetary union.
He cannot devalue to claw back 30pc in lost labour competitiveness against EMU's German bloc, or take emergency steps to slow the property crash. In an odd lapse last week – perhaps a slip – he advised Spaniards that the best thing to do in these dark times was to ****.
Yes, it is dangerous for the Bank of England to buy up a third of all long-dated gilts. But it would be even more dangerous to allow deflation to run its course in an economy where debt levels have reached such extremes. Debt and deflation are a deadly mix.
The errors that led to our current predicament are well-known. A small army of economists – Austrians, Monetarists, and Keynesians – warned that central banks were playing with fire by fixing the price of credit too low and ignoring asset bubbles. The $6.7 trillion in reserve accumulation by China, Japan, and the petro-powers drove bond yields too low for safety.
Credit signals were gravely distorted. In Britain, Gordon Brown poured petrol on the fire by pushing the fiscal deficit to 3pc of GDP at the top of the cycle. Wretched man. However much we rage at Sir Fred or Citi-wrecker Chuck Prince, let us not forget that this crisis was confected by governments. To blame the free market is to miss the bigger point.
But I digress. We are now faced with the post-debt wreckage. The task at hand is to hold our societies together as best we can. One dreads to think what would have happened if the Hoover-Brüning nostalgics had succeeded in blocking every remedy.
As it is we have seen industrial production collapse in every region. The drops in January were: Japan (-31pc), Korea (-26pc), Russia (-16pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc). Falls that took two years from late 1929 have been compressed into five months.
Those who say this is nothing like the Great Depression are complacent. Household debt is higher today, and UK banks are in worse shape. (No bank of size failed in the British Empire during the slump). Britain's economy contracted by 5.6pc from peak to trough in the early 1930s (Eichengreen). Some put the figure at nearer 8pc. We may surpass that this time.
America suffered worse. Real GDP fell 28pc. But the worst occurred in the second leg, after the heinous policy blunders of late 1931. Reading contemporary accounts, it is clear that hardly anybody – not even Keynes or Fisher – realised that the world was slipping into a depression during the first 18 months.
Nobel laureate Paul Krugman says the Fed has been as far behind the curve today as it was then, given the faster pace of collapse. It is bizarre that Ben Bernanke has not started to buy US Treasuries a full three months after he floated the idea, despite a yield rise of 80 basis points.
He has been stymied by the hawks. Kansas chief Thomas Hoenig said last week that the top priority is to drain liquidity before recovery later this year sets off inflation. Well, Mr Hoenig said last May that inflation psychology was gaining a hold "not seen since the 1970s and early 1980s" with a risk that inflation would become "embedded in the economy." The price spike broke within weeks. If his model was wrong then, why is it right now?
As for the ECB, it has not reached the starting line. Jean-Claude Trichet insists that there is no danger of deflation in Europe. What is the weather like on his planet, asked Mr Krugman.
The ECB has cut rates to 1.5pc, but since they need to be minus 1pc on the Taylor Rule, this leaves the breach as wide as ever. The Bundesbank is blocking any serious move towards quantitative easing.
Given that Germany's economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland's SNB are cash printers these days.
So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.
I'll take the Old Lady of Threadneedle Street any day, warts and all.
Last updated 12/03/2009