The economic crisis reached a turning point this week. Admittedly, it might have passed you by, as one piece of bad news blended relentlessly into another. And there was certainly no fanfare to mark this change, still less any sign of a break in the clouds.
No, what I am referring to is the sense of resignation, or surrender, that has crept into the economic argument – a collective global realisation that public policy, fiscal and monetary, has reached the limits of its ability to fight the downturn. To many of you, this might have been obvious for some time. But there remained a deluded belief that governments and central banks could magic away the crisis, or at least save us from its worst consequences.
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Two events this week have highlighted that, despite a stimulus of unprecedented proportions and scope, they cannot. The first was the additional austerity package announced by Greece under pressure from its European masters. To be tightening so severely into an ever-deepening contraction looks like economic madness, but the Greeks have no choice. And the second was the spectacle of Jean-Claude Trichet, president of the European Central Bank, asserting his determination to “normalise” monetary conditions – while tacitly acknowledging the impossibility of even trying to do so, as long as the eurozone economy remains as stagnant as it is.
Policymakers are desper
By Jeremy Warner Published: 6:42PM GMT 05 Mar 2010
Comments 39 | Comment on this article
The economic crisis reached a turning point this week. Admittedly, it might have passed you by, as one piece of bad news blended relentlessly into another. And there was certainly no fanfare to mark this change, still less any sign of a break in the clouds.
No, what I am referring to is the sense of resignation, or surrender, that has crept into the economic argument – a collective global realisation that public policy, fiscal and monetary, has reached the limits of its ability to fight the downturn. To many of you, this might have been obvious for some time. But there remained a deluded belief that governments and central banks could magic away the crisis, or at least save us from its worst consequences.
Two events this week have highlighted that, despite a stimulus of unprecedented proportions and scope, they cannot. The first was the additional austerity package announced by Greece under pressure from its European masters. To be tightening so severely into an ever-deepening contraction looks like economic madness, but the Greeks have no choice. And the second was the spectacle of Jean-Claude Trichet, president of the European Central Bank, asserting his determination to “normalise” monetary conditions – while tacitly acknowledging the impossibility of even trying to do so, as long as the eurozone economy remains as stagnant as it is.
Policymakers are desperate to unwind the “unconventional support”, to activate “exit strategies” and begin the long march back to normality. But there is still little sign of the sustained private-sector recovery required to take up the slack.
Rewind a year, and the world economy stood on the brink of outright catastrophe. Equity and debt markets were pricing in levels of default that indicated a repeat of the Great Depression. In Britain, the Bank of England slashed its interest rate to an unheard-of
0.5 per cent, and a massive £175 billion programme of quantitative easing was announced to counter the contraction in credit. Broadly similar action was taken around the world, accompanied by equally dramatic fiscal loosening.
A year on, and the roof plainly hasn’t fallen in. There has been a severe economic contraction, but unemployment hasn’t climbed to anywhere near the levels predicted, asset and commodity prices have rebounded strongly, and because of record low interest rates, many are feeling better off than they were. Those seeking an explanation of why the Conservatives aren’t faring better in the polls need look no further: over the past year, Britain has had what amounts to the biggest pre-election giveaway of all time.
Yet there is a continued air of unreality about the whole thing. Everywhere in the West, and even in China, the “recovery” – such as it is – floats on a sea of public support, with the hoped-for rebound in underlying private-sector activity as elusive as ever. More worrying still, the stimulus is beginning to peter out of its own accord. Conscious of the dangers of ending support prematurely, many governments would hope to run large deficits for quite a bit longer. Impatience in the bond markets is fast closing off this option.
Greece may be in its own particular class of basket case, but it is also just a harbinger of things to come for all fiscally stretched advanced economies. What Greece is being obliged to do is no more than what the IMF would impose if called on to provide support.
Without urgent pre-emptive action, we’ll all eventually be in the same boat. In the UK, the cost of government bonds has risen, despite the massive purchases made through quantitative easing. This reflects not so much the risk of default, which is negligible for a country with its own currency, as the threat of inflation. The collapse in sterling has added to inflationary pressures, and led to notably higher market interest rates. Investors worry about who is going to pay for all that public borrowing, and are raising rates accordingly.
The effect is to render much of the debate around the timing and appropriateness of “exit strategies” irrelevant. Economies are at one and the same time both unprepared to end the extraordinary support of the past year, and being forced to end it regardless.
The best solution to a fiscal deficit is growth, yet growth has to battle with the inevitability of spending cuts and tax rises to come. Is there any way out? The UK is pinning its hopes on exports – but, regrettably, we are not alone. The French government this week announced plans to eliminate the industrial deficit over the next five years by raising production by a quarter. The line-up of export hopefuls is getting ever more crowded.
As the drug-induced stupor of public support wears off, the pain will be almost universally felt. Public policy may have smoothed the comedown, but it hasn’t permanently suspended it. If there is one positive to be drawn from these widening deficits, it is this: they have at least focused attention on the intergenerational debts that we threaten to heap on to our children, and provided the wake-up call needed to address them.
Sadly, the necessary structural reforms must begin with our unsustainable pension and healthcare costs. Which means that working longer and saving more will become the defining mantras of the next decade.
Comments: 39
how much can a 'developed country ' continue to grow by ? apart from building olympic stadiums.
Not long to wait now - a month or two until the election. Then the brown stuff will hit the revolving ceiling fixture and the real recession will begin. Bring it on! We are getting nowhere at the moment and I suspect many marginal businesses are hanging on by their fingertips (and risking personal insovencies) hoping for recovery that will not arrive any time soon. Many of these businesses will simply be blown away once things really kick off. It's very hard for a small trader to let go of what may be a lifetime's work. Let's get on with reality before too many of these people get their homes and retirement savings too wrapped up in their business. I'm sorry, all this talk of delaying the pain really just increases the ammount of harm being stored up - not just in nationial debt, but also in small buinesse debt, where the banks will be demanding 'leans' on owner homes and other capital before they advance the money that small firms need to survive their normal cashflow bumps.
Whoever thought it was a good idea for Germany and Greece to have the same currency should be led away to the nearest padded cell.
This is exactly what the UK has to face over the next few months. Whoever wins the election has some very nasty decisions to make, from 2001 until 2008 the UK went on a credit binge since then you have suffered a mild hangover due to the fact that crazy amounts of money have been injected to prop up the failing economy producing a false impression of the real problems. The budget was 650 billion and the predicted overspend 200 billion which means that you have spent 30% more than you have budgeted for therefore you need to make cuts and/or raise taxes by a whopping 24% of the total amount spent just to bring your spending back in line with the budget, you then have to try and address the massive mountain of debt as well, when the implosion comes it will be very nasty and I hope Brown will still be in power to take the flak when there is no money to pay government salaries or benefit checks.
"To many of you, this might have been obvious for some time. But there remained a deluded belief that governments and central banks could magic away the crisis, or at least save us from its worst consequences." And the most deluded of all is your colleague Ambrose Evans Pritchard.
The Title of this article says it all and what happens in Greece today may well befall other western economies in the not too distant future. The nature of democratic governments is that they appease the electorate to which they serve. Greece needs to tax more and spend less but tax those who to date have evaded or avoided recklessly imperilling their fellow countrymens well-being and spend less on pensions. Greeks should work at least to age 65. Greeks are rightly in my viewing facing the music now for profligacy and financial deviousness in the past and if it means they are ejected from the Euro they need only ask themselves why.
Warner recycles the tired old fallacy, that we had to whistle or be crushed under an epidemic of elephants, and we did and weren't, so whistling was right. There were cheaper alternatives to QE, that could and should have been evaluated before we rushed blindly into a vastly expensive process with no obvious exit strategy - but Warner&Co ignored we Doubting Thomases.
Ted Knight on March 06, 2010 at 08:12 AM Where elese would they put their money with interest rates at 0.5pc. Would you lend money to the UK government at 4pc fixed for 10 years if you think its going to print its way out of recession and inflate debt away.
"because of record low interest rates, many are feeling better off than they were" And many - retired people and those relying on their savings - are not feeling better off. Low interest rates have destroyed their incomes. The only people who are better off are the over-borrowed. Punish the frugal. Reward and protect the prodigal. Spot what's wrong with this picture....
Governments and central banks have been trying to prevent the day of reckoning for years. They have run out of bullets. In much of Europe and the USA the government has become too big. It is slowly killing our economy and its size needs to be slashed. Government must only provide what the market fails to. We cannot go on with large unfunded state welfare programmes and government largesse. These destroy wealth and create economic misery not prosperity. We cannot afford to pay for them. We must return to a system of sound money based on precious metals or a basket of commodities. The government must not be allowed to steal from the people by creating inflation. A sound economy must be based on savings and investment in wealth creating projects. In other words, we must produce things that people want and finance it with savings and minimal debt. We have been living in a fantasy world supported by debt and easy money. Levels of sustainable GDP are probably a lot lower than where we are now. Hard times are ahead but if we cut our coats according to our cloth life need not be miserable.
The little man is being targeted again. No proposals to change the monetary system and begin the much and long needed attempt to move away from debt based usery. The next puppet in the bankers game is waiting to come on stage. His name is Cameron.
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