The European Central Bank has acted. Across the 17-nation Eurozone, the benchmark re-financing rate was slashed on Thursday, from 0.5pc to a record low of 0.25pc. In Greece, Spain and other economically-fragile Eurozone members, where inflation is worryingly low, many welcomed the ECB’s action. In Germany, with its historic inflation aversion, Teutonic eyebrows were raised.
What’s beyond debate is that this latest ECB move is the prelude to a renewed round of money-printing. While America’s quantitative easing is meant to be “tapering soon”, in Western Europe the funny-money dials have just been turned up.
“As a practitioner of markets, I love this stuff,” said Stanley Druckenmiller. “This stuff is fantastic for every rich person. It’s the biggest distribution of wealth from the poor and the middle classes to the rich ever.”
Druckenmiller is among Wall Street’s most fabled investors. He started Duquesne Capital in the early 1980s then teamed up with George Soros, running the legendary Quantum Fund. Together they made billions by “breaking the Bank of England”, shorting the pound in massive volumes and forcing sterling out of the Exchange Rate Mechanism. That was in 1992.
The quotation above is more recent. Druckenmiller said these words on CNBC television last Thursday and the “stuff” was quantitative easing. While extremely critical of America’s $85bn-a-month money-printing habit, Druckenmiller is at least decent enough to acknowledge that, as a wealthy chap with a bucket-load of equities, the Federal Reserve’s asset-buying programme has made him even richer.
It’s five years since the “sub-prime crisis” began in earnest. Lehman Brothers filed for bankruptcy on 15th September 2008. The resulting financial meltdown lead to the first global recession in living memory, so causing countless job losses and widespread human misery.
Questions such as “what have we learnt?” and “could it happen again?” are of sufficient importance and complexity to fill thousands of columns inches, running to millions of words. I offer here, then, a necessarily brief explanation of why I believe the Western world’s policy response to sub-prime has been deeply flawed, and why we’re now even more vulnerable to another debilitating systemic collapse.
“When the music stops,” Chuck Prince famously observed back in mid-2007, “things will get complicated”. The then Chief Executive of the US banking giant Citigroup was admitting that growing concerns about sub-prime loans could ultimately shatter what we now know was “irrational exuberance” on global financial markets.
“As long as the music is playing, though, you’ve got to get up and dance,” Prince continued. “And we’re still dancing”. There’s a “we’re still dancing” mood on global markets today, just as there was six years ago, in the run-up to what turned out to be the disastrous market melt-down of September 2008.
“I’m sorry Liam, we’re losing you,” said John Humphreys on BBC Radio 4’s Today programme last week. “Oh what a shame, we can’t hear him,” the grand inquisitor continued. “It’s a very bad line”.
Explaining the implications of “negative interest rates” on the UK’s most influential news bulletin is tough at the best of times. Doing so when the communication link between you and the studio drops out, making you incommunicado 15 seconds after you’ve started speaking, makes the task more difficult still.
Mark Carney seemed to give a convincing account of himself at the Commons Select Committee last week. The soon-to-be Governor of the Bank of England presented UK Parliamentarians with an economic tour-de-force, while pressing the right political buttons too.
In a hearing that attracted intense media scrutiny, Carney’s repeatedly committed himself to a “flexible inflation-targeting framework”. In other words, while the Bank of England’s 2pc inflation goal will remain central to its policy-making process after he takes the reins in July, there is scope for lengthening the period during which that target should be reached.
In September 2010, Brazilian Finance Minister Guido Mantega pointed his rhetorical finger at the United States and accused the world’s largest economy of conducting a “currency war”. Suggesting that emerging markets were being unfairly squeezed by a falling dollar, which makes US exports more competitive, Mantega lit the touch paper on a controversy that won’t go away.
For now, “currency wars” are a relatively arcane debate limited to foreign exchange specialists and diplomats. But this issue has already adversely affected hundreds of millions of people who consider themselves largely immune to the vicissitudes of international markets, not least in the UK. History shows, also, such currency disputes can escalate from rhetorical spats into disastrously counter-productive economic conflict.
Last week ended with some pretty bleak news for the UK economy. “Output shrinks yet again,” the broadcast news bulletins boomed. “Britain now faces the dreaded triple-dip recession”.
The latest UK GDP numbers are certainly disappointing. National output fell during the last three months of 2012, down 0.3pc on the quarter before. This economic contraction, the fine-print shows, was driven by a 1.8pc industrial production decline and, within that, a 1.5pc fall in manufacturing.