Sunday, February 14, 2010

Fear Of Clowns

More than a passing resemblance to Bliar Imp.

Tyler has just discovered what's been ailing him all these years. It's called coulrophobia - a morbid fear of clowns - and apparently P Diddy (whoever he is) suffers from it.

Suddenly it all makes sense. As you will not need reminding, the country is currently in the clutches of the most terrrifying bunch of clowns ever to escape from a high security Big Top. Coulrophobia - no wonder we're hiding under the bed.

And what a petrifying routine our clowns have subjected us to these last 13 years. They've robbed us blind, screwed up our public services, undermined our culture, taken us into dodgy foreign wars, and left us with an old jalopy of an economy that can't even make it out of the ring.

But you know, the really scary thought is that the next act might not be a whole lot better. Whereas you and I hoped we'd be rescued by a lion-tamer, or at the very least a fire-eater, you can't help worrying it might just be another bunch of scary clowns.

What's especially scary is the thought that they might shy away from actually fixing the jalopy, settling for yet more tinkering instead. And recent statements about repairs not needing to be "particularly extensive" have given our nerves a right old jangling.

Or are we being irrational - another bout of coulrophobia?

No. The danger is all too real, and this morning we've got another of those famous open letters from the economics establishment spelling out why. Its 20 signatories include the former chief economist of the International Monetary Fund, a former deputy governor of the Bank of England and head of the Financial Services Authority, and a former permanent secretary to the Treasury and cabinet secretary. For balance, they also include a Labour peer, who is also Britain's best-known Marxian economist.

They write:
"...there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.
In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.
...the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case... for the first measures beginning to take effect in the 2010-11 fiscal year.
The bulk of this fiscal consolidation should be borne by reductions in government spending...
...introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals."
So... an immediate start, elimination of the entire structural deficit (10% of GDP) over 5 years, emphasis on spending cuts not tax increases, and independent fiscal oversight.

True, there's nothing here we haven't blogged many times on BOM. But the point about these 20 economists is that they can't all be coulrophobics.

We need a lion-tamer, and we need him quick.

PS There's been much talk over recent days about the vital need to coordinate monetary and fiscal policy. Sounds kinda sensible, but what does it actually mean? Presumably, the idea is that as the government tightens fiscal policy over the coming years, the Bank should not tighten monetary policy at the same time, for fear of a double-whammy impact on demand in the economy. Fair enough. But what if inflation starts to be a problem, as we very much fear? Should the Bank stand aside? Surely we all learned back in the 70s that we cannot afford to let inflation get a grip, however awkward it may be to raise interest rates. And surely we also learned that a weak economy is no protection against rising inflation - a weak economy means a weak currency, and before you know it you've imported a whole bucketful of inflation. Add in a panicky globalised bond market re-sensitised to monetary incontinence, and suddenly interest rates in all but the very shortest maturities shoot up pretty well irrespective of what the Bank does with its monetary policy. Far better to let the Bank carry on focusing monetary policy on inflation, and not divert it into doomed attempts to stabilise GDP against the spending cuts (Note that the 20 economists don't mention this monetary and fiscal coordination idea. And the Bank Governor was also pretty sniffy about it when our Steph asked him to comment during his press conference last week. So hopefully it's no more than a vacuous soundbite.)

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