This is a very important article. It is a "but-the-emperor-has-no-
clothes" moment. Liam Halligan attacks the whole lazy consensus
which misrepresents the present crisis and purports to solve it by
doing everything to make it worse.
The Tories come in for criticism too but at least they have nailed
their colours to the mast in one respect - they have declared that it
is madness to seek to cure a crisis of over-borrowing bt borrowing
more and throwing the proceeds piecemeal at favoured bits of the
economy.
The Labour 'old guard' are revelling in the 'collapse of capitalism'
as they see it and demand that Brown "does something" which always
involves more borrowing and greater expenditure of money we do not
have. (as readers saw yesterday this madness is also hyped by the
dreadful Polly Toynbee!)
Yesterday Ireland saw its largest ever demonstration after mass
unemployment and wage cuts; the government has failed after riots in
Latvia, Greece has seen extensive rioting and now domestic terrorism;
Spain has seen unrest. The world's top politicians will be here in
London on April 2 and will clearly be a prime target. Make no
appointments in central London for that day.
As the politicians continue to make things worse consider what Liam
Halligan says below.
xxxxxxxxxxx cs
===============================
SUNDAY TELEGRAPH 22.2.08
Inflation is the greatest danger to the British economy
Deflation is being used as a spectre to cover a power grab on the
Bank of England and the failure to force the banks to come clean,
says Liam Halligan.
By Liam Halligan
On BBC Radio 4's Today last week, I was accused of being "bonkers".
That was after I argued the UK faces serious inflationary dangers -
not least due to the impending use of the Bank of England's printing
press. My concerns that our "borrow-more, spend-more" bail-out will
make a bad situation worse were similarly dismissed as "absurd".
Allow me to explain why the real issue is inflation - and not the
deflationary spectre that's been conjured up to scare us. Allow me to
outline how to escape this crisis, the path our politicians should be
taking, rather than their current disastrous course. Then you, dear
reader, can judge who is "bonkers", whose reasoning is "absurd".
UK interest rates have been slashed to 1 per cent - a 315-year low.
Our budget deficit is heading for a colossal 10 per cent of GDP -
bigger than the shortfalls that saw the UK go "cap in hand" to the
International Monetary Fund in the mid-1970s. Government borrowing,
having risen sharply in recent years, will soon spiral to levels not
seen since the Second World War. Meanwhile, the pound has lost a
third of its value in less than a year - pushing import prices up.
All these developments are inflationary. Fiscal and monetary policy
are wildly out of control. Yet inflation, we're told, isn't a
problem. Inflation is yesterday's news. Politicians and their pet
commentators warn of deflation under every stone. I accept that
falling prices warp incentives, increase real debt burdens and - if
expected to continue - stymie retail spending. That's what plunged
Japan into a decade-long recession in the 1990s.
But UK deflation simply doesn't exist. In December, annual CPI
inflation fell to 3.1 per cent - way above the Bank's 2 per cent
target. That number was used as "evidence" we're on "the brink of
deflation". Anyone examining this data could see the lower inflation
rate was driven by the one-off 2.5 point VAT cut. [Due to end at the
end of the year -cs] . Adjusted for tax, the CPI actually rose - from
3.9 to 4.1 per cent. That's not surprising given that our ailing
currency saw import prices rise a painful 14 per cent. CPI inflation
fell to 3 per cent in January. Again, the detailed data is
instructive. Food price inflation hit 10.3 per cent. Even "core
inflation" - excluding food and fuel - rose, despite the screams of
"deflation" from Whitehall and beyond.
Why are our so-called leaders creating deflationary fears? As an
excuse for grabbing monetary policy back off the Bank of England and
nailing interest rates to the floor, while junking fiscal caution and
borrowing in a fashion akin to that of a banana republic. Our
historically ignorant politicians - and their pliable, time-serving
technicians - have responded to the credit crunch by avoiding the
real issues. Using "deflation" as an alibi, they've taken the line of
least resistance. Now, in a final desperate throw of the dice, we're
seeing "quantitative easing" - in other words, "printing money". How
will this ridiculous policy help? Have we learnt nothing from
Zimbabwe, Argentina or the Weimar Republic? The huge inflationary
dangers of "QE" are obvious - in particular alongside massive
government borrowing, a tumbling currency and repeated interest rate
cuts.
The UK's policy will make historians wince. But being seen to be
"doing something" is easier than doing what really needs to be done.
For that would involve politicians tackling powerful vested interests
and admitting to previous regulatory mistakes. Ministers, first and
foremost, need to hose down a banking sector that's holding the
country to ransom. Our most senior bankers should be gathered in a
locked room and - under threat of custodial sentence - be forced to
disclose the full extent of their potential sub-prime losses. At the
moment, banks are lying about the liabilities they face. That's why
they won't lend to each other - which has gridlocked the inter-bank
market, blocking crucial credit lines to firms and households.
Banks rendered insolvent must be merged and/or nationalised - with
the bad loans "fessed up" and written off before more taxpayer money
is spent on recapitalisation. Gordon Brown has taken a "head-in-the-
sand" Japanese approach - creating the UK's "zombie banks" which are
technically alive (allowing powerful executives to keep their jobs
and save face) but commercially dead, and a drain on society given
the extent of their toxic debts. We instead need the kind of hard-
headed banking purge the Swedes used to escape financial crisis in
the early 1990s. Until that happens, and the inter-bank market re-
boots, the UK will continue to haemorrhage jobs.
Beyond this, Brown's regulatory regime must be scrapped, returning
responsibility for bank supervision to the Bank of England, where it
belongs. The split between the Old Lady and the Financial Services
Authority is inefficient and dangerous - as we've seen. In addition,
the Bank needs greater power to impose counter-cyclical reserve
requirements - so banks create less credit when the economy is
booming, but more in a downswing. That would take the pressure off
interest rates as a tool of demand management - a blunt, discredited
instrument.
Above all, we need desperately to reimpose the split between
commercial banks (which take in deposits, then lend to ordinary
businesses) and investment banks (which use higher risk strategies).
The removal of this "Glass-Steagall" firewall in the UK and the US is
the prime reason for the crisis. By merging with commercial banks,
leveraging their taxpayer-backed deposits and using them to place
reckless bets, the investment banks have destroyed the financial
strength of the Western world. Yet still, our politicians hesitate.
Bewitched by the power of the money men, they fail to do what must be
done.
If he had any self-awareness, Gordon Brown would hang his head in
shame. His big spending, and debt accumulation, contributed mightily
to our grave situation. But the Tories need to examine their
conscience, too. For years, they backed Labour's irresponsible
spending plans. Since the crisis began, their ideas on banking and
regulatory reform have been vague and incoherent. The UK faces a wave
of inflation, a potential gilts strike and the danger of another IMF
bail-out. What is HM Opposition doing to stop this policy vandalism?
Has David Cameron got the courage to risk ridicule by pointing to the
madness of the policy consensus?
------------------------------------------------------
Liam Halligan is Chief Economist at Prosperity Capital Management
Sunday, 22 February 2009
Posts
