One Grey Wednesday Coming Right Up

THURSDAY, DECEMBER 11, 2008

One Grey Wednesday Coming Right Up

dont mention the currency war

There's some previous here. The outburst from the German Finance Minister has strong echoes of several previous contretemps, and not just over Poland. In particular we should recall the events leading up to Black Wednesday - our ejection from the ERM in 1992.

One of the reasons we blew out was that Germany was persuing a policy of strict monetary control (ie high interest rates) to contain the inflation fallout from German reunification. Our economy was in the pit of recession and simply couldn't handle it.

We begged Germany to cut their rates, especially at a rancorous meeting of EU finance ministers (Ecofin) the previous weekend in Bath. Norman Lamont was chairing that meeting and here's the New York Times' account:

"Lamont grilled Schlesinger [head of the Bundesbank] as if he had hauled him before a select committee of the House of Commons. The German civil servant was deeply offended.

"Every finance minister here wants you to cut your rates," Lamont shouted at Schlesinger, unimpressed by the latter's explanation that cuts were not possible without unleashing inflation in Germany and the rest of Europe. Lamont would not take no for an answer and pressed for a commitment. Schlesinger flushed, stood up and made as if to head for the door. Finance Minister Waigel had to put out a hand to stop him and take the floor in his defense.

"My dear Norman," Waigel warned Lamont, "you have asked us that question four times, and four times we have given you the same answer. We do not see the need for wasting any more time."

Three days later the market delivered its devastating verdict.

But, you say, we're not in the ERM any more, so we don't need to worry. Let the Germans go hang.

Hmm.

While it's quite true that sterling can float freely (thank God), let's not imagine it's a free lunch. As we've blogged before, every time sterling falls, all of us get poorer. Our imports get more expensive, but our incomes don't rise. As our currency crumbles, international investors take fright and demand a higher price for all that cash we need to borrow. And if sterling goes for a real walk - as it is right now - they might stop lending altogether. Which would be a tad awkward.

What the German Finance Minister is really telling us is that we need to brace up and take some pain. We've overspent and overborrowed, and the day of reckoning is at hand. Trying to spend our way out of trouble will only make our situation worse - we simply don't have the financial standing to sustain it.

He's also telling us something else: vainglorious claims by Herr Brown to be speaking for the entire civilised world are total sauerkraut.

WEDNESDAY, DECEMBER 10, 2008

Don't Care For Germans, Fawlty

Little Lord Peston is appalled.

How dare the Hun criticise our Beloved Leader! How dare the German Finance Minister say:

"The speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing. Our British friends are now cutting their value-added tax. We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? 

All this will do is raise Britain's debt to a level that will take a whole generation to work off. The same people who would never touch deficit spending are now tossing around billions. The switch from decades of supply-side politics all the way to a crass Keynesianism is breathtaking. 

When I ask about the origins of the crisis, economists I respect tell me it is the credit-financed growth of recent years and decades. Isn't this the same mistake everyone is suddenly making again, under all the public pressure?"

The morning, the British Ambassador in Berlin handed the German government a final note, stating that unless we heard from them by eleven o'clock that they were prepared at once to withdraw their statement of a bleedin' obvious but deeply inconvenient truth, a state of extreme embarrassment would exist between us.

And remember - this particular Bosche is a socialist. Just like the Beloved Leader.

Going Green And Scaly

Is this what you want?

BOM readers will be familiar with the green and scaly option.

It goes like this: do you want to install our recommended CozeeHome^TM pay-nothing-til-next-September double glazing solution, or do you want to die from hypothermia this winter? And do you want to make smallvirtuallyimperceptible changes to your disgustinggasguzzlinglifestyle now, or do you want to die in a globalinfernofamineflooddisaster in 2033? And do you want to support the right-minded, commonsense, all-men-of-goodwill policies we are pursuing, or do you want to go green and scaly?

We had a good example on BBC TV News last night. Their Economics Editor Hugh Pym (who I'm sure used be one of Bertie's chums in Jeeves and Wooster) explained the difference between Labour and Tory fiscal policy. It turns out that Labour policy involves a £20bn investment (sic) in the economy, whereas Tory policy does not. Tory policy involves not helping the hard working families down in the village. It means standing by while they starve to death.

Clearly Hugh thinks this "investment" will have a pay-off. But will it?

For one thing, it's actually pretty small, even peripheral, in terms of the crisis now engulfing the village. Many of the villagers have borrowed far too much - more than any other village for miles around - and their panicky priority now is not to go on spending, but to pay down their debt. £20bn against a £1.5 trillion personal debt mountain and massive job uncertainty, is not going to change that priority. Especially as the hard-pressed village money-lenders are now calling in their loans.

Second, this "investment" is very short-term: it will all have to be repaid in a couple of years. Indeed, the main message of Darling's recent maxi-Budget was not his investment, but the appalling realisation that the public finances are infar worse shape than even the pessimists had supposed.

We've blogged before on Ricardian Equivalence - the idea that public debt is deferred taxation and so debt funded tax cuts fool nobody - and last week veteran FT commentator Sam Brittan passed his damning judgement on Darling's budget:

"The November 24 pre-Budget report turned out, at best, a damp squib and, at worst, counterproductive. Little of the discussion was on the fiscal stimulus but rather on the subsequent tax increases required "to pay for it". If an old-school economist had deliberately tried to arrange a demonstration against fiscal policy, he could hardly have done better."

We disagree with Sam's contention that Darling should have just kept quiet about the post-election fiscal tightening - we surely ain't that dumb - but he's right to call for the establishment of a more sustainable fiscal and monetary framework (including a set of Friedmanite fiscal rules emphasising the extent to which taxpayers are willing to fund government services).

In any event, there is widespread agreement that the demand boosting impact of Darling's package is likely to be quite small.

The much more pressing problem is the availability of bank credit. As the National Institute for Economic and Social Research puts it today:

"The Government faces the real risk that, despite the measures it took in last month's Budget, output will fall more sharply than it expected to the end of next year. The main problem that it needs to address very urgently is the availability of bank credit..."

In this world, the truth is that fiscal "giveaways" are almost irrelevant in terms of lifting the economy. But on the other side, they do increase our public debt, making our longer-term path to recovery even more difficult.

So why weren't Dave and George able to get that across on the BBC?

Part of the explanation is that nobody has quite found the right words.

But more fundamentally, as we've blogged many many times, the tax-funded BBC is a left-leaning statist organisation. They will always see public spending as"investment", and they will always see themselves as taking the part of the helpless villagers against the barons.

Or taxpayers as the rest of us call them.