Wednesday, June 18, 2008

Global Factors Entirely Beyond Our Control

Maybe he's mad... yes, that's it!

If Tyler has to listen again to Yvette Cooper telling us how the inflationary collapse of the Brown bubble is not Labour's fault, he's going to do himself a serious mischief.

On Newsnight, her line was that while the boom phase was down to Labour - because that was caused by Labour's brilliant domestic economic policies - the current bust phase is down to international factors entirely beyond Labour's control.

Look, one more time:

  • Labour's first ten years coincided with an extraordinarily benign global environment - cheap money pumped out by the US combined with cheap goods pumped out by China and all points East
  • Labour inherited a domestic economy in great shape - still rebounding from the early-90s recession, still with surplus capacity, and still fuelled by the boost to competiveness from ERM withdrawal; the public finances were in good shape, and best of all, the economy was so much more flexible and union free than it had been when Labour was previously in power
  • The Brown boom was built on debt - public spending ripped far ahead of tax revenues, the property market soared, and the City roared away on cheap global money (supercharged by Sarbanes Oxley)
  • The debt bubble is now collapsing - as debt bubbles always do (see Galbraith's classic The Great Crash)
  • The global environment has turned much less benign, with all that Eastern growth blowing out in commodity price inflation
  • Having maxxed the credit card, Labour has no scope to act... er... except... OMG...

The real worry about our current position is that with just two years to go before they get pulped, this bunch of clowns will reach for the bottle again.

Think about it. CPI inflation is now way over the 2% target, and there's a real risk the Bank will need to whack up interest rates later this year. They have to do that because their sole concern is to keep inflation on target.

You're Brown. You don't want to get pulped. You start to wonder if that simple unambiguous Bank inflation mandate was such a great idea after all. Yeah, come to think of it, the whole gig wasn't actually your idea in the first place - it was Balls! That same guy who also nuked you last year by talking up the election. Yeah... the same guy. Is he mad? Post-neoclassical endogenous... sure, he's bright... but maybe he's mad. The intensity... those staring bulging eyes... and that wife of his... My God! That's it! I've allowed myself to be be svengalied by a madman!

Last week, over our lunch on the Hill, Huggy told Tyler that the Bank's mandate would soon be changed (don't ask - Huggy just knows these things). Just like the US Fed, the Bank's job will be broadened to include growth as well as inflation. In other words, they will be told they can accept higher inflation in order to keep voters from being thown on the dole queue.

Tyler scoffed. Hah, he said, they'll surely never do that. Everybody knows that's the quick route back to the bad old days - Brown would be laughed out of court.

But now Tyler's not so sure. The idea is certainly out there. It's being voiced. If the Bank starts to raise rates in the face of mounting unemployment, it may well sprout legs.

Take yesterday's World At One. Martha interviewed Nobel Prize winning economist Joseph Stiglitz, deferring mightily to his sagacious pronouncements. And what did he propose? Downrating our fixation with low inflation and giving much more weight to jobs and growth. The costs of fighting inflation are apparently too high.

Naturally, there was no mention whatsoever of the fact that Stiglitz is a notorious lefty who holds some deeply implausible views about the role and competence of government (like markets always fail and governments know best).

But park that. The clear message is that we should brace ourselves for the BBC and the rest of the Prog Con establishment pushing this idea as the malaise worsens.

We must be extremely vigilant.

1 comment:

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