Britannia Radio

Here you have a real contrast.  Ambrose Evans-Pritchard emerges as an 
arch Keynesian while Liam Halligan is warning that such policies will 
drop us straight into the worst possible outcome !!

Frankly I think A.E-P is wrong and Halligan is spot on!

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SUNDAY TELEGRAPH    29.3.09
Only a united front at the London G20 can save the world from ruin
Industrial production is collapsing faster than during the Great 
Depression. Social and political devastation will not be far behind, 
unless the G20 can heal global divisions, writes Ambrose Evans-
Pritchard.

Ambrose Evans-Pritchard

By the time world leaders gathered to vent their spleens at the 
London Economic Conference in June 1933, the Slump had already done 
its worst. Catastrophic policy errors - tight money - had caused the 
1930-31 recession to metastasize into debt deflation. Hitler had been 
let into government with three cabinet seats, enough to give him the 
Prussian police and Reich interior ministry. It was all he needed.

Any country that tried to reflate alone was punished by creditors. 
Most stuck grimly to liquidation. Europe and America undercut each 
other with beggar-thy-neighbour moves on trade and gold. The surplus 
countries refused to play their part in restoring demand - just as 
they refuse today, either because they will not (Germany and the 
Netherlands, who between them have a surplus of $294 billion) or 
because they cannot for structural reasons (China, $401 billion).

It was impossible for deficit states to fill the breach, so the 
system folded on itself. Today, the biggest deficits are: the US 
($673 billion), Spain ($155 billion), Italy ($73 billion), France 
($57 billion), Greece ($50 billion), Britain ($46 billion). When the 
Banque de France withdrew gold deposits from New York in October 
1931, the US Federal Reserve was forced to raise rates from 1.5 per 
cent to 3.5 per cent at a terrible moment. It knocked the stuffing 
out of the US banking system. Needless to say, France was the bigger 
loser from this petulant act, though that took time to become evident.

The London Conference was a fiasco. President Roosevelt refused to 
attend. He took a sailing holiday to flag his contempt for Old World 
posturing. FDR feared a trap to draw America back onto the Gold 
Standard - the source of the misery - and to lock the White House 
into Europe's deflation orthodoxies. As delegates waited, he cabled a 
message mocking the "old fetishes of so-called international 
bankers". Keynes defended him as "magnificently right".

The London G20 comes earlier in the depression cycle. A good thing 
too. The fundamental circumstances are worse today than in the early 
1930s. The debt burden is higher. The global economy is more tightly 
intertwined. The virus spreads more swiftly.

Do not be misled by apparent normality. Unemployment lags, and social 
devastation lags further - although it has already hit the Baltics 
and Ukraine. Do not compress the historical time sequence either. 
Life seemed normal in early 1931 when the press reported "green 
shoots" everywhere. Part Two of the Depression was the killer. Part 
Two is what we risk now if we botch it.

Yes, we have done better this time. We saved the credit system. 
Central banks have slashed rates to near zero in half the world 
economy. The heroic Bank of England has pioneered monetary stimulus a 
l'outrance, even if the ungrateful wretches of this island mock their 
own salvation. But we must move faster because world manufacturing is 
collapsing at three times the speed. The damage that occurred from 
late 1929 to early 1931 has been packed into six months. Japan's 
exports fell 49 per cent in January. Holland's CPB Institute says 
global trade shrank 41 per cent (annualised) from November to 
January. Industrial output has fallen heavily over the last year: by 
31 per cent in Japan, 24 per cent in Spain, 19 per cent in Germany, 
17 per cent in Brazil, 13 per cent in Russia and by 11 per cent in 
the UK and US. Almost all has occurred since September.

In any case, the European Central Bank (ECB) is still standing pat. 
It is partial to medieval leech-cures - and hamstrung by the lack of 
EU debt union. Now, if the G20 were to convey the world's wrath at 
Europe's monetary paralysis, we might get somewhere. But Gordon Brown 
has been sidetracked by fiscal flammery. We are past that stage. Only 
the printing presses can rescue us, and the ECB refuses to print. 
Tactically, Mr Brown erred gravely by promising "the biggest fiscal 
stimulus the world has ever seen". It is not his gift, and comes ill 
from a deadbeat state that cannot sell its own bonds.

There again, was it wise for the Czech premier and titular EU 
president to rubbish Barack Obama's fiscal blitz as the "road to 
hell"? That too comes ill from a leader who has just lost a no-
confidence vote over his handling of the Czech economy. But the 
hapless Bohemian speaks for Europe, where Hooverism is written into 
EU Treaty law. Indeed, last week Brussels fired anathemae at Greece, 
Spain, France, Britain and Ireland, for breach of the 3 per cent 
deficit rule. We must retrench under Regulation 1466/97. Laugh not.   
[It's all very well to sneer at this farcical act.  Brussels HAD TYO 
issue those warnings - it's the law!!!  a daft law as it happens, but 
the law-cs]

Germany's finance minister, Peer Steinbruck, is still digging in his 
heels against "crass Keynesianism". No matter that his economy will 
shrink 6-7 per cent this year. Germans must sweat it out: some more 
than others. Unemployment may reach five million in 2010. No doubt 
spending is a poor instrument, and we are all sick of bail-outs. But 
Mr Steinbruck might brush up on history. It was the deflation of 
1930-1932 - not the hyperinflation of 1923 - that killed Weimar 
democracy. (Communists and Nazis won half the Reichstag seats in July 
1932). The neo-Marxist Linke Party is already angling for 30 per cent 
in June's Thuringia poll.

You may agree with Mr Steinbruck. Fine. Capitol Hill does not. The 
most protectionist Congress since Bretton Woods is not going to 
acquiesce as precious US stimulus leaks abroad to the benefit of 
"free-riders". Patience will snap. "Buy American" is already US law.

The risk is that this G20 becomes the defining moment when a 
disgusted American political class - sorely provoked - turns its back 
on the open trading system. The US alone has the strategic depth to 
clear its own path, and might find eager partners in a "pro-growth 
bloc" - much as Britain led a reflation bloc behind Imperial 
Preference in the early 1930s. As the world's top exporters, Germany 
and China should take great care to restrain their body language this 
week.

Well done, Mr Brown, for trying to hold the world together. But if 
the summit degenerates into a shouting match between mercantilist 
creditors and prostrate debtors, it may serve only to frighten 
markets and tip us into the next - more violent - downward leg of 
this slump.
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2. It's time to admit inflation is going to be a major problem
I don't wish to be smug. But can we now agree that, despite repeated 
warnings from ministers and the City, the UK won't get caught in a 
"deflationary spiral" and inflation is a much greater danger?

By Liam Halligan

For months, this column has argued that the spectre of deflation has 
been conjured up by those whose hubris and incompetence caused this 
crisis.
It's given Gordon Brown an excuse to indulge the Keynesian wet-dreams 
of his political adolescence, spending our money willy-nilly, with 
absolutely no regard for the impact on future generations.

Even before this sub-prime debacle, his borrowing was far too high.
But having failed to put the UK's fiscal house in order during the 
good years, Brown has now set fire to the whole shebang.

The reason, we're told, is that because deflation is imminent, "the 
danger of doing too little is greater than the danger of doing too 
much".

"Deflation is coming" has been the mantra of the City economists too.
Could their views be influenced by the institutions employing them?
Hyped-up deflationary fears have certainly led to an awful lot of 
taxpayer-funded "soft credits" being chucked towards the Square Mile.

Meanwhile, the supposed cure, "quantitative easing" (sic), is 
allowing banks that should fail, that need to fail, to rebuild 
balance sheets they themselves destroyed by years of wild risk-
taking. So, if you're a washed-up, spendthrift Prime Minister, or a 
banking executive desperate to cover up past mistakes, "look out, 
deflation" is a useful message to get into the mind of the public.
Barely pausing to look at the evidence or question WHY our so-called 
leaders are saying this, the press has too easily obliged.

The UK economy contracted 1.6pc during the final three months of 2008 
and 0.7pc the quarter before.

This is now a deep downturn - the worst since the early 1980s and 
counting. Retail sales growth was a perky 3.8pc in January, but 
slumped to 0.4pc last month.

Despite that slowdown, and the "deflation is nigh" warnings, CPI 
inflation ROSE in February - to 3.2pc, up from 3pc the month before.

So grave is the deflationary danger that the Bank of England has just 
written a letter to the Treasury explaining why inflation remains 
ABOVE its 2pc target - as it has been for 17 months.

RPI inflation fell marginally last month, to 0.0pc. But that measure 
stresses house prices - which, of course, have dropped sharply.

Desperate to drum up more free taxpayers' cash, City economists were 
only last week forecasting the February RPI number would be minus 
0.7pc. How wrong can you be?

The RPIX - similar to RPI, but excluding housing costs - also rose 
last month and, while the deflationists tried to attribute February's 
CPI number to rising food prices, "core inflation" - which excludes 
items with volatile prices such as food - shot up too.

Why? Because, weighed down by lax fiscal and monetary policy, the 
pound has lost a third of its value in just over a year.

That pushes up import prices and overseas goods account for a very 
high share of UK household spending.

In my view, inflation will get much worse in the medium term.

By the time "quantitative easing" is over, the UK will have more than 
doubled its monetary base.

Deflationists say low lending offsets that but M4 - the broadest 
monetary measure, which includes bank lending - is still growing by 
16pc a year.
Lending to households is 5pc down on last year. Lending to firms is 
still expanding but only by 4pc, compared with 15pc average annual 
corporate credit growth since 2005.

But credit to OFIs - other financial institutions - is now growing at 
a colossal 45pc annual rate, so banks are "still lending", as they 
say, but mostly to their own off-balance sheet vehicles which they 
set up in  previous years to take crazy risks.

That lending will find its way into the economy and is still 
inflationary - even if ordinary punters are "credit crunched".

So, both base and broad money are now expanding rapidly - storing up 
huge future inflation, despite the slowdown.

I accept that, during the early summer, the RPI may go negative for a 
month or two. Oil prices were up above $140 in May and June last 
year, and will this year be much lower - weighing heavily on the 
index. But such "base effects" will be short-lived and very quickly 
reversed.

Oil was $40 a barrel in December 2008 and, as explained below, could 
easily be at $60 by the end of this year - 50pc higher.

That will send the inflation indices into orbit, just as the vast 
monetary expansion starts feeding through.

So, please, let's stop pretending deflation is a problem.

We need an honest, robust debate about fiscal meltdown, bank balance 
sheets and future inflation - the genuine problems we face.

West set for a crude awakening
AS THE G20 denizens battle to save the global economy, one positive 
they can point to is the price of oil. Since soaring last summer, the 
cost of crude has collapsed.

That lowers fuel bills and helps Western oil importers cut their 
(often gaping) trade deficits. How bad would things be if, as well as 
financial meltdown, we had high oil prices too?

Well, that could easily happen. Oil prices moved firmly above $50 
last week - almost 40pc up from their February low. Until now, most 
economists have accepted the "demand destruction" story - assuming a 
slowing world economy would use less oil, keeping a lid on prices.

But crude has recently rocketed, despite the prospects for global 
growth being worse than at any time during this crisis. Across the 
Western world, GDP growth forecasts are being scythed. The US, the 
world's biggest oil importer, is now contracting at its fastest rate 
for three decades. In Japan, the world's second largest economy, oil 
imports are at a 20-year low.

So why is oil going up? Well, "demand destruction" was never as big a 
deal as economists in oil-importing countries wanted to believe.

The big emerging markets now account for a large share of world-wide 
oil use. Their population growth, and on-going economic expansion, is 
keeping global oil demand firm.

At the same time, recent low crude prices have caused production 
cutbacks. In the past six months, the number of active oil rigs in 
the US - still a major crude producer - has dropped nearly 50pc.

Even worse, high credit costs have led to much lower spending on 
future production capacity.

In Saudi, UAE, Russia and other leading producers, numerous oil 
infrastructure projects have lately been mothballed or axed.

That's one reason why oil markets are showing such a steep "contango" 
- with futures contracts way above today's "spot" price. Oil for 
delivery in December 2009 is now more than $60 a barrel, rising 
beyond $70 a year later.

Something else is going on too. Across the world, many sophisticated 
investors and money-managers have never believed the self-serving 
"deflation is coming" mantra being pumped-out of London and 
Washington. And as Western governments lose control and central bank 
printing presses crank-up, the "inflation not deflation" crowd is 
growing.

That's why oil prices are rising. As a tangible, scarce asset like 
gold, crude is increasingly being used as an easily tradable anti-
inflation hedge.