Here are two views as to the way ahead. I find Ian Campbell’s approach the simpler and more robust and logical. Warner does not really make up his mind as is revealed in his last paragraph which opts out with “We'll see how it plays out”.
He marshalls the facts but then is not prepared to stick his neck out and make a judgement, but is content to be a spectator. He's missing his SatNav
Christina
TELEGRAPH 8.9.09
1.’Breaking News’ - Brown, the great stimulator, is putting economy in danger with his profligacy
Ian Campbell
Spend and Save with Brown, That’s the message the prime minister has sent to world leaders. But Gordon Brown’s campaign is more about saving himself than the world - and, in fact, puts the global economy in danger
His line is that the world can be fully saved if governments deliver the entire promised $5 trillion (£3 trillion) fiscal stimulus rather than just half of it. The UK itself helps to show that the argument is wrong
Brown is Europe’s biggest stimulator. He can wave a 13-pc-of-GDP fiscal deficit to prove it. But the UK’s expensive fiscal stimulus measures have been practically useless. A 2.5%point cut in VAT expected to cost the government about £14bn, always looked likely to be ineffective. Last month a PricewaterhouseCooper’s survey found that 88% of people said the cut had not prompted them to spend.
In the UK and elsewhere fiscal aid is proving far inferior to monetary policy. Bank of England rate cuts are saving Britons about £26 bn a year in interest payments. Long-term cost ? Zero! How much debt incurred ? None. How easily reversed ? By any BoE meeting.
Meanwhile Brown’s exploding deficit has doubled the UK’s debt in a few years. It may take two decades to reverse. Investors are unlikely to be encouraged by the Brown outlook of high taxation and low consumer spending.
The dangers of fiscal profligacy are also near term. With economies beginning to recover higher fiscal deficits could generate inflation. That would not only lead to higher bond yields , making business loans and mortgages more expensive, it could also prompt central banks to increase short term interest rates. In other words, ineffective fiscal profligacy could force effective monetary stimulus to be reversed, pushing a still more indebted world back towards recession. Brown’s profligacy, masked as prudence, should be shunned.
2. Public or private, excessive debt must eventually be lanced
Grant me chastity and continence, but not yet. So says the famous prayer by St Augustine. It seems to have been followed to the letter by the G20 finance ministers in their communiqué last weekend.
By Jeremy Warner, Assistant Editor
Nations are invited to work hard on developing credible "exit strategies" from the extreme fiscal, monetary and financial sector support which has been applied over the last year.
Controls on bank bonuses, leverage and much tougher capital requirements have also been agreed in principle, though the paucity of detail is symptomatic of marked differences in approach to these matters.
Yet, by common agreement, none of this commitment to donning the hair shirt is to be implemented any time soon, for fear it would disrupt the still fragile economic recovery. The idea is rather to convince markets that everything is under control – that when the time is appropriate, after the economic recovery has become self sustaining, the necessary action will be taken to unwind today's potentially toxic mix of easy money and burgeoning public debt.
Is this approach to policy safe, or are we not simply creating even worse problems for the future by fighting the credit overhang with more of the same?
There may be some merit in countering the workout of excessive private debt by replacing it with excessive public debt if it succeeds in easing the pace and pain of the correction, but it plainly offers no kind of long-term solution. Meanwhile, lack of self restraint among bankers in so quickly resuming bumper bonuses [especially in state-owned banks -cs] risks provoking an extreme political clampdown on finance which might crimp growth for years to come. At the same time, the prevarication over tougher capital controls only prolongs the problem of unrecognised bad debt in large parts of the European banking system.
Even so, for the time being few would seriously dispute the G20 approach, which essentially follows the old Keynsian principle that, if we look after the short term, the long term will take care of itself. History is littered with salutary lessons in the premature withdrawal of policy stimulus. For Britain, the latest G20 commitment to keeping the stimulus intact is perhaps even more important than elsewhere. [He misses the point. Monetary stimulus appears to work. Fiscal stimulus does nothing beneficial but it piles up debts -cs]
The dire state of the public finances means there is nothing left in the fiscal cannon for the UK to fire at the recession. The Bank of England's programme of quantitative easing, whereby vast amounts of government debt are being bought with newly-created money, is also proportionately much larger than anywhere else, making it hard to see how the authorities can go much further with their "funny money" policies without damage to financial credibility.
Britain has reached the end of the road in terms of the policy response, yet still we seem to be emerging from recession rather slower than anyone else in the G7. The UK must therefore rely on growth elsewhere in the world to pull the economy out of the mire.
Yet even Germany and France, which returned to growth in the second quarter, have been persuaded of the potentially debilitating consequences of an early exit. Heavily reliant on export markets for its economic prosperity, Germany has as much interest in sustained international recovery as Britain.
Germany's dismissal of the "crass Keynsianism" of Anglo Saxon deficit spending is only a politically convenient fig leaf to disguise a rather bigger fiscal response to the crisis than has been applied almost anywhere else other than China.
It's a way of saying to the markets and the voters that Germany remains the only true guardian of the faith as far as fiscal discipline is concerned while in reality pursuing the opposite set of policies.
Germany's automatic stabilisers, which acknowledge that the deficit will rise of its own accord during periods of recession because of lower tax revenues and greater benefit spending, have always been larger than many other advanced economies.
The cash-for-clunkers programme has also been proportionately bigger than anywhere else, as have wage subsidies to industries and companies regarded as strategically important. [I have myself failed to understand how Germany persuaded the EU to let them do this! -cs] The rhetoric on the supposed evils of deficit spending is substantially at odds with the reality.
To avoid a double dip recession, Germany and others will have to continue with these policies for much longer than they would instinctively think prudent. To end them now would almost certainly condemn these countries to a second leg of the downturn.
Analysis in the International Monetary Fund's last "World Economic Outlook" powerfully supports the contention that recessions associated with financial crises tend to be unusually severe. What's more, they are doubly serious when globally synchronised. So much, so self evident.
More alarmingly for the future, recovery from such recessions tends to be long and weak. Monetary action helps but, because downturns caused by an excess of credit are inevitably accompanied by widespread deleveraging until households and businesses again feel financially secure, there is a powerfully negative effect on private consumption, rendering much of the monetary stimulus impotent.
Absence of external demand in a globally syncronised downturn further enhances the problem. In these circumstances, fiscal stimulus can become vitally important in supporting domestic economies.
Unfortunately, the capacity of Western governments to apply this support is becoming ever more limited.
According to projections by the IMF, general government debt in Britain as a proportion of GDP is set to more than double over the next five years to nearly 100pc. The scale of the deterioration for the US, Germany and France isn't nearly as bad, as they start with much higher public debts in the first place, but everyone ends up in much the same place.
There has to be a question mark over whether markets will in practice support government debt on such a scale. Even assuming they do, the effect may be to crowd out private sector investment vital to any sustained recovery. In any case, there is only so far you can go with deficit spending to counter a recession. The effect is going to be limited if the end result of loose monetary and fiscal policy is to erode credibility and force up longer term interest rates.
The policy dilemma is all too obvious. If the fiscal and monetary stimulus is taken away too soon, the recovery is stifled at birth. If, on the other hand, the necessary fiscal and monetary consolidation is left to late, then the opposite problem occurs. Persistent monetarisation of government deficits will, perhaps rather more quickly than central bankers assume, eventually cause bond yields and inflationary expectations to rise. As Nouriel Roubini, the New York economist who correctly called the credit crunch, has observed, policy makers are damned if they do and damned if they don't.
For the time being, the risks of withdrawing the policy stimulus too soon are judged by the G20 nations to be greater than letting it ride. They seem to have little choice in the matter if they are to stand any chance of cementing the recovery and gaining the following wind of resumed growth needed to address burgeoning deficits.
We'll see how it plays out but just because it's hard to disagree with the approach doesn't necessarily mean it's assured of a benign outcome. Chastity and continence will eventually be imposed with or without the compliance of policy makers.
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