Sunday, 26 October 2008

Roger Bootle gets the point

Reading the British press online this morning shows that large parts of it still do not really get the chief point about the current economic situation. There are discussions about how Britain is in recession, as shown by the horror of a 0.5 per cent contraction of the economy in the last quarter and so on. If that is what is at stake then really a great deal of fuss is being made about not a great deal.
No one has ever succeeded in eliminating the business cycle and if what we are going through is a cyclical downturn then that is no great surprise and the economy will simply emerge out at the other end. No need to change business as usual.
Thus a group of monetarist economists opine in their letter to the Sunday Telegraph that: 'Occasional slowdowns are natural and necessary features of a market economy'.
The Sunday Times noted: 'Economists said that while Friday’s gloomy third-quarter figures for gross domestic product, showing a drop of 0.5%, had hit the pound, there could be a silver lining in them. "The figures didn’t surprise me,” said Gerard Lyons, head of research at Standard Chartered. “The recession will be significant and it will last for four quarters. But the size of the fall we’ve already seen will spark policymakers into action."' He, however, is not quoted as saying what action is required.
Misunderstandings are not confined to the political right. The Observer for example, to judge by its front page headline, considers that there is no story going on which is bigger than a potentially illegal £1 million donation by a member of the Rothschild family to the Tory Party, while its lead business story is 'America joins UK on brink of recession'. The Guardian's editorial on Saturday read: 'senior figures at the Bank of England admit that a "deep and severe recession" looks increasingly likely, while others talk about a recession that will last for a whole year, with the economy only really recovering by 2011...No one can seriously argue that this will not be a recession; the question is whether it will be a Labour recession.'
With all due respect to the Guardian no, that is not the really decisive question. The really key question is whether there will be a recession or a deep economic collapse - a depression of the type not seen since the 1930s. SEB has explained why from the point of view of economic fundamentals it should be possible to confine the situation to a very severe and unpleasant recession. But that depends on their being extremely firm and decisive action to prevent something worse developing.
One person who does get the point however is Roger Bootle. The Sunday Telegraph notes of his views on the Monetary Policy Committee of the Bank of England that: 'Roger Bootle, managing director of Capital Economics, said: "I don't understand why they are not contemplating a one or two percentage point cut in interest rates. They are very quick to raise borrowing costs but far less daring when it comes to cutting them.
'"It's a failure of vision by many of the members. Either they think they are in a university seminar or that this is merely a minor slowdown. In fact, they're facing something which might approach the Great Depression.
"They need to be thinking are more boldly about policy. If they aren't careful, the members of [the MPC] will go down as some of the worst monetary policy-makers in history."
Quite. Bootle is spot on. It is why a minimum one percent cut in interest rates is required immediately. And it is why Vince Cable was quite right to say publicly that if the Bank of England is not prepared to take decisive action, in a very short term period, to radically reduce interest rates its independence should be taken away.

1 comment:

Martin Slavin said...

I think this report marks the early creaking of a tipping point in a tectonic shift in the global balance of powers.

BEIJING (Reuters) - The United States has plundered global wealth by exploiting the dollar's dominance, and the world urgently needs other currencies to take its place, a leading Chinese state newspaper said on Friday.

The front-page commentary in the overseas edition of the People's Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.

A meeting between Asian and European leaders, starting on Friday in Beijing, presented the perfect opportunity to begin building a new international financial order, the newspaper said.

The People's Daily is the official newspaper of China's ruling Communist Party. The Chinese-language overseas edition is a small circulation offshoot of the main paper.

Its pronouncements do not necessarily directly voice leadership views. But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington's economic policies and global financial dominance in the wake of the credit crisis.

"The grim reality has led people, amidst the panic, to realize that the United States has used the U.S. dollar's hegemony to plunder the world's wealth," said the commentator, Shi Jianxun, a professor at Shanghai's Tongji University.

Shi, who has before been strident in his criticism of the U.S., said other countries had lost vast amounts of wealth because of the financial crisis, while Washington's sole concern had been protecting its own interests.

"The U.S. dollar is losing people's confidence. The world, acting democratically and lawfully through a global financial organization, urgently needs to change the international monetary system based on U.S. global economic leadership and U.S. dollar dominance," he wrote.

Shi suggested that all trade between Europe and Asia should be settled in euros, pounds, yen and yuan, though he did not explain how the Chinese currency could play such a role since it is not convertible on the capital account.

A two-day Asia-Europe Meeting (ASEM) of 27 EU member states and 16 Asian countries was set to open on Friday. Though few analysts expect much in the way of concrete agreements, Shi said it could prove momentous.

"How can Europe and Asia grasp each other's hands and together confront the once-in-a-century global financial crisis sparked by the U.S.; how can they construct a new equitable and safe international financial order?" he said.

"The world is waiting for this Asian-European meeting to achieve big results in financial cooperation."

(Reporting by Simon Rabinovitch; Editing by Ken Wills)