Mervyn King – At last an honest banker?
When BSD first began posting comments and news on the gathering global economic storm, the established wisdom amongst bankers and politicians was “Crisis – What Crisis?” Bankers continued to demonstrate unbridled greed and politicians stuck their heads firmly in the sand and hoped the problems would just blow away. The result of that persistent refusal to take necessary decisions has delayed the onset of a widespread depression but made the eventual depression that much more serious.
The Summer of 2012 is proving a lull before the storm but the first signs of the depth of the coming storms has just been outlined by the Governor of the Bank of England. He is the first senior financial figure to say that he can see no significant positive growth in the global economy and in Britain the best forecast is 0% growth. He sees no prospect of reducing the Bank Interest Rate below the 0.5% that has operated for three years in Britain because any relief would add to the ultimate problems and further distress savers who have so far carried a disproportionate share of the pain in an attempt to keep bankers earning the outrageous bonus payments that they have become addicted to. He has sounded a caution on further quantitive easing (printing money) because any short term benefits are likely to be overwhelmed by an increase in inflation. Most tellingly, he has been the first financial figure to honestly admit that he has no idea what to do to promote a recovery.
It is a great pity that bankers and politicians were not honest at a much earlier date, admitting that they were now in uncharted waters and that no part of the global economy was insulated from the effects of the coming storm.
The leaders of the EuroZone carry a large portion of the blame for creating the current situation and the growing storm, because they started by lying consistently, then attempting to blame everyone else, then hoping for handouts from the expanding economies, particularly China and India. It is very difficult to escape the conclusion that the politicians have simply been too stupid to understand what was happening and then resorted to propaganda to hide the emerging crisis. In future decades there may be debate as to which was the most serious failing, stupidity or attempting to cover things up. They were certainly ably assisted by greedy bankers who were happy to ignore the growing dangers while they continued to draw excessive and obscene bonuses
In Britain the outgoing Labour Government was happy to leave a note for the incoming Coalition Government that effectively crowed over the reality that they had spent every pound, borrowed to the limit of their credit and then committed to spending that was not covered by funds (effectively writing rubber cheques that would bounce and bounce). Sadly they were not unique in their cheerful economic incompetence but typical of Governments across Europe. Now in opposition, the Labour Party continues to call for irresponsible spending although this is a cynical political ploy because even they know that irresponsible spending would destroy the national credit rating, dramatically increase borrowing costs and lead to bankruptcy as has happened in Greece and is happening across most of the EuroZone.
What the Governor of the Bank of England has courageously described is the onset of stagflation on a scale greater than was suffered in the 1930s during the previous Great Depression. What happened then was that politicians ran out of options and saw productivity stagnating and inflation ripping through economies. During the last two years, we have been moving rapidly into that position again. It means that the option to borrow huge sums with which to attempt to spend a way out of Depression is no longer an option because lenders no longer have the confidence to advance money even at massive interest rates. Much money has already been moved into metals and other durable commodities, raising the prices to a point where they must now begin to fall. There is no spare money to increase individuals’ earnings, but most of the essentials on which they depend will begin to suffer increasing inflation as the effects of money printing begin to work through the economies.
What the Governor of the Bank of England has really said is that he is confident that Britain has battened down the hatches as best it could, there is nothing positive that can now be done to further protect the British economy and Britons should prepare to take it on the chin. The only piece of good news is that the situation in Britain is significantly better than it was two years ago and the economy may be seriously battered but it should not sink. How well is survives depends on what late actions the EuroZone can take to make their disaster better managed. Britain and other countries have moved most of their cash out of the EuroZone and reduced their exposure to EuroZone debt. However, the cycle of supply and demand means that the EuroZone debts will have to work their way through the global economy. China and India are already finding that their growth is faltering and they are heading for their own set of very difficult situations. Where a small country like Greece can at least manage to operate soup kitchens for an increasing percentage of the population, feeding a population of a billion during an economic disaster is on such a massive scale that the probability of social unrest and even civil war increases dramatically. A very unsettling sign is that the military are extending their influence and control in China. This increases the probability that conflict will extend beyond national borders as happened in Europe and Asia in the wake of the Great Depression. That new gathering Depression is even more serious and raises global instability.
In the long term there will be recovery. The current difficulty is in making forecasts of when that will happen with any level of accuracy and without any method of accurately judging the level of damage that will be inflicted first. In the 1930s, the initial recovery was fueled by the build up to global war. That war then inflicted a further round of massive damage that resulted in many countries suffering horrific shortages and having to battle for years to achieve any meaningful recovery. In the process the balance of power changed across the world.
The most worrying aspect is that the political leaders have shown themselves to be unable to rise to the great challenges. In many countries, an arrogant and incompetent political elite of professional politicians have failed so spectacularly that no existing political party in those countries is fit to be reelected. In Britain, the Labour Party proved that it is unworthy of providing a government for very many years and perhaps for ever. Each Labour Government since the first, which contributed so much to the disasters of the 1930s, has left a worse mess when they eventually left government. The LibDems have proven that they are unfit to be anywhere near the levers of power and their Tory partners in Coalition have failed to demonstrate that they are worthy. That is a very serious situation because it means that the electorate has the unenviable choice of deciding whether to elect the least repulsive of the three very unappetizing political parties, selecting one of three major failures, or taking a chance on the UK Independence Party. To form a Government, the UK Independence Party will have to draw the support of voters from the three old failed parties. That means that the nature of UKIP will change as its support base becomes more diverse. It does potentially offer significant benefits because unlike the three failed parties, UKIP has no heritage of dogma to side track it from serving the people and it is famously based on candidates who are not professional politicians and have already had to make their way in the world by their own efforts. This situation is mirrored around Europe and beyond. Britain is very fortunate that UKIP is not an extremist party, but in other countries, the only alternative to the failed professional politicians is extreme parties with extreme views.
There are some bright lights in the darkest of tunnels.
In the US the Republicans are presenting a cautious venture capitalist for President and a radical Tea Party Congressman for Vice President. In office, this could well be the ground breaking new team that will power the US out of its own self-induced problems. Of course the first challenge is to be elected and in a country that claims to be the most tolerant in the world of religions, it seems that the Republican Presidential candidate will first have to overcome religious bigotry to get elected.
In Britain, the UK Independence Party is already picking up support from across the political spectrum and has a complete manifesto that includes some sensible if revolutionary policies. One notable policy on taxes is to remove all of the layers of complexity to dramatically reduce the opportunities for tax evasion, aggressive tax avoidance and simple tax avoidance, while slashing the cost of tax collection and insisting that HM Revenue and Customs collects every penny that is due to the Exchequer. One of the spectacular failures of Labour Governments has been to intorduce draconian taxes under the banner of soaking the rich, only to see the value of tax receipts fall and rich to find creative ways of not paying the new taxes, placing the real bruden of tax on the poorer elements of society. That will be bad news for multi-national companies like Goggle who have been so successful in avoiding taxes around the world. There are critics who say that the UK Independence Party should have remained where it started as a single policy party of ultra conservatives, but it moved from that position long ago. It is still a Thatcherite Party but Margaret Thatcher was a radical conservative who happened to become a Tory Party Leader and one of the most successful British Prime Ministers of all time. She demonstrated that conviction politics are productive for all communities within a nation. The UK Independence Party has since moved into completely new environment and is proving able to recruit the young and those who have previously given up on voting. With skillful management, the UK Independence Party could break new electoral ground to achieve a majority in a first past the post General Election, currently scheduled for 2015. Ahead of them is the opportunity to fight a European Parliamentary Election that could see them establish themselves as the majority British Party, building on their achievement at the previous European elections when they came second to the Conservatives, having outstripped the Lib Dems and Labour. If they come a close second or become the first Party, that will provide a huge boost for their chances at the next Westminster elections.
In Europe the old established political elite are facing some very difficult elections and the break up of the Euro Zone would so damage their position that the EU itself would start to break up. This outdated socialist bureaucracy is long overdue for radical reform or extinction and one benefit of the current economic crisis is that European countries will no longer have to rip themselves apart in debating membership because economic forces may remove that issue.