If We Can't Have a Durable Recovery at this Price, Can We Have One at All?
There used to be a Homeric quality to lunches in the City of London and not simply because they were epic in quantity and duration, although they often were.
No, at table the young hero stood to hear eternal truths from ancient oracles. All he* had to do was remain sober enough to recall them the next day.
One such luncheon came to mind this week as financial markets reeled. It took place twenty years ago. I was the young hero (well it’s my piece) and the oracle was a legendary stockbroker. He’d been in the business so long that he might well have broked stock to Homer himself. But he was contemplating retirement by this time and so felt free to be expansive.
“The trouble with monetary policy,” he boomed, “Is that it is asymmetric.”
There was a pause here to pass favourable judgement on the second bottle of Haut Brion. Then he continued.
“You see, if you restrict the money supply, by raising interest rates or what have you, you will cause your economy to slow.”
"The trouble is,” he went on, “If you loosen things up by cutting interest rates you may get the economy going again, but you may not.”
And with that the oracle had perfectly foreseen the situation we now find ourselves in. I remained sober enough. I remembered. (He never lived to see it, in case you are interested. Passed away in his sleep in the Cayman Islands five years after this luncheon and went wherever stockbrokers go.)
There has been loosening. Lord there has been loosening. It has been without precedent. Interest rates have been at record lows across the developed world for years now. There has been money printing - Quantitative Easing. Endless gazillions these economies would never have otherwise seen, pumped in like monetary methadone.
IF THERE IS A MODERN-DAY JOHN MAYNARD KEYNES OR HARRY DEXTER WHITE OUT THERE SOMEWHERE WE NEED YOU NOW
And yet we still don’t have a durable recovery. And if we can't have one at this price it makes you wonder. Can have one at all? Bank of America/Merrill Lynch has recently started talking about Quantitative Failure - the end of central banks as we have known them.
More broadly the markets are buckling primarily because investors no longer believe that the monetary authorities at the wheel have either a realistic roadmap or an effective vehicle. Investors are effectively trading as if the system had failed. Well they might. 489 million people are currently living in countries with official negative interest rate policies, the US bank calculates. The price of gold is soaring. That happens when faith in the authorities is crashing.
Now we can debate exactly why the monetarism which once looked so unassailable - part of the End of History, no less - has ceased to work and why as my oracle foresaw all the monetary easing in the world is not necessary or sufficient to ignite the animal spirits. And we should, urgently. Maybe we all overestimated China, perhaps the endless crises of Europe have played a part, or maybe it’s the changing demographics of Western nations.
Honestly, I don’t know. In my defence, I don’t think anyone else does.
But we need to find out. And we need to find out soon. It’s time for every finance minister and central bank chief in every major economy to stop what they are doing right now, and head back to Bretton Woods. There the last international monetary settlement was born. We need another one.
And if there is a modern-day John Maynard Keynes or Harry Dexter White out there somewhere we need you now. Because this gets bad. Stand up.
Please God, make them stand up.
*I’m using “he” here because it always was. I’m not defending that, incidentally, just letting you know that I thought about it.
About the author
Born and raised in Swansea West, one of the safest Labour seats in the country, David is perhaps unsurprisingly a High-Tory, Euroskeptic Royalist Libertarian with an unhealthy adoration for Ronald Reagan and Margaret Thatcher. As a result he is seldom pleased by anything that ever happens, and always on the verge of quitting the whole jamboree. A former Special Writer at the Wall Street Journal, he knew the crash was coming when he saw a piece about Louis XVI reproduction furniture "for your Winnebago."
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