Western Central Banks Are Ignoring The Lessons Of History

Oil prices rallied last week, after a surprise drop in US crude inventories. Despite on-going volatility ahead of the Opec exporters’ cartel meeting on April 17th, the trend seems clear. Oil is up 40pc since mid-January.

The dollar fell, meanwhile, as minutes from the Federal Reserve strongly suggested US interest rates won’t rise anytime soon. The greenback is at its weakest against the yen since 2013 – which is how Uncle Sam likes it, given the related export boost.

Far from “normalizing rates” over 2016, as was promised December when the Fed hiked borrowing costs for the first time in a decade, America’s central bank could soon employ yet more “extraordinary measures” – as some of us said at the time.

Financial markets are so fragile, and addicted to central bank stimulus, that higher US rates could provoke a cataclysmic crash. Instead, the moneymen are screaming for further “quantitative easing”, going beyond the massive $4,200bn Fed balance sheet expansion since late-2008.

No wonder the International Monetary Fund, in its latest quarterly Global Financial Stability Report, once again points the finger at “spillovers from China” and “policies in the emerging markets” as the cause of angst on global markets. The Western world needs an alibi if the Fed, and the Bank of England for that matter, are forced to resort to even more “funny-money”.

Rather than admit unconventional monetary policies aren’t working and, beyond the immediate emergency post-Lehman measures, have done far more harm than good, some of the world’s leading economies are preparing to take this crazy experiment still further. That’s happening even as financial markets increasingly question whether ever more stimulus is welcome, or a sign of deep panic.

The Western policy-making establishment is ignoring the basic lessons of economic history. An ever-growing number of ambitious public intellectuals are now advocating “overt monetization” or “helicopter money” – the use of straight cash handouts and/or public infrastructure spending financed directly by central banks. While politically seductive, such notions are an economic counsel of despair, a fast-track to a lasting loss of both investor and consumer confidence and deep economic stagnation.

When it comes to QE and helicopter money, no one can know the breaking point – the moment central bank credibility finally shatters. It’s all very well to talk smoothly about “Peoples’ QE”, and roll your eyes at the naysayers, but logic dictates such breaking points exist. As and when we reach them, the resulting bond yield spikes and currency lurches will cause widespread economic damage, not least given the lack of scope for further interest rate cuts or extra spending by fiscally maxed-out governments.

Such outcomes will destroy countless businesses and jobs, upending millions of lives. They will also, given the severity of the Lehman collapse and subsequent solemn vows to “learn lessons”, cause the general public very seriously to question, in both sorrow and anger, the economic management capabilities of ruling Western elites.

It’s tempting to devote this weekend’s entire column to the on-going crisis in Western central banking. The geopolitical horse-trading ahead of the upcoming Opec summit in Doha also warrants serious attention.

I simply must return to subject of Brexit, though – not least given last week’s publication of a government leaflet arguing explicitly to remain in the European Union, sent to 27m UK households. This has, rightly, proved extremely controversial. One reason is the £9.3m cost to taxpayers.

More fundamentally, the leaflet amounts to blatant propaganda – so much so that even the typically measured Electoral Commission was provoked to comment: “We don’t think the government should have done this”. The leaflet gives the Remain camp an “unfair advantage”, the Commission says, while “undermining the principle” of the campaign spending limits ahead of the referendum on 23rd June.

Some economic commentators – typically on newspapers unequivocally backing the UK’s EU membership, just as they tried to push us into the single currency – conclude the leaflet is “largely fair and generally true”.

A leaflet, the very existence of which is criticized by the Electoral Commission and amounts to a travesty of carefully negotiated campaign rules, can never be “largely fair”. The text itself is a master-class in passive aggressive manipulation, full of statistical sleights of hand designed to play on the fears of ordinary folk trying to follow a complex debate.

“Over 3 million UK jobs are linked to EU exports,” the leaflet says. Maybe, but you don’t need to be a member to trade extensively with the EU. Norway and Canada do, as does Switzerland – to a greater extent than us. The UK will anyway strike a post-Brexit free trade deal with the EU, not least as we buy £60bn a year more in goods and services from EU nations than we sell them.

“We will keep our own border controls” in the EU, says the government. I’m not sure we have meaningful border controls. The UK isn’t part of the (rapidly-collapsing) Schengen agreement, which means EU nationals must wave a passport on arrival. But every EU citizen still has the right to live and work in the UK. We have no say – and that’s the point. While we’re in the EU, we can’t choose to admit each year a certain number of workers, selected for their skills, as happens in Australia, Canada and, above all, the US – which boasts the world’s most successful and vibrant immigrant culture. Managing our borders in this way won’t stop the UK being a successful and harmonious migrant economy. It will actually enormously assist in that by helping maintain public confidence in the immigration process.

“There will be tough new restrictions on access to our welfare system for new EU migrants,” we’re told. Really? These measures are subject to further negotiation with other EU members. Even if agreed, they’ll only last seven years.

“There would be ‘pressure’ on the value of the pound” if we left the EU, the government tells us. Over the last month, as the Leave campaign has gained in opinion polls, the pound has actually risen against the dollar. And if sterling falls, so be it. That could help address our massive trade deficit.

“EU membership brings economic security, peace and stability,” we’re told. That’s not strictly true. European security and peace over the last half century has stemmed from Nato. Our security services collaborate within the “Five Eyes” system, sharing serious intelligence only with the US, Australia, Canada and New Zealand. Senior security figures privately deride EU intelligence sharing as “limited”, given the inherent lack of trust. Sir Richard Dearlove, the Former Boss of M16, has just done so publicly.

“EU membership magnifies the UK’s ability to get its way on the issues we care about”. This is abject nonsense. The UK is constantly outvoted when it opposes EU measures – more than 3 dozen times since 2010. We’ve lost almost four out of every five cases we’ve brought before the European Court. “The diplomatic headspace, and political capital we pour into the EU each year, seriously limits our ability to get stuff done elsewhere in the world,” a very senior diplomat told me over a beer last week. “Think what we could achieve in Asia, Africa and all those fast-growing markets, if we weren’t constantly engaged in stopping the Europeans build their completely unworkable superstate”.

Across the entire EU, euroscepticism is growing – as shown not just by last week’s Dutch vote, but repeated opinion polls in Finland, Italy, France and elsewhere. We British, with our Brexit referendum, are on the right side of history – if only our government had the sense to see.

Follow Liam on Twitter @liamhalligan.


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