The world was looking to the new administration in the United States for an economic rescue package which would lead the way out of the recession. On Tuesday, the U.S. Secretary of the Treasury, Tim Geitner, made a speech on his rescue plan for the banking industry. The speech fell flat, to the considerable disappointment of a global audience. As Milton wrote in Lycidas – “The hungry sheep looked up and were not fed.”
It had been hoped that the Geitner plan would support a further rally in the stock market. In fact, he only spoke for half an hour. During that period the S & P 500 fell by 3.4 per cent. The market – and particularly the traders – was disappointed by his lack of detail. Some people expressed disappointment that he did not commit the new administration to drawing a line under the crisis. The new administration had allowed expectation of a New Deal to grow, and this was not a new deal.
On Wednesday, the Bank of England published their inflation report, which was preceded by a briefing by the Governor of the Bank, Mervyn King. Mervyn King had a better response than Tim Geitner, though he would be embarrassed for anyone to say so. The Bank of England did not draw a line under the recession, but it did reveal a new forecast. It expects the trough of the recession to come in the middle of 2009, to be followed by a recovery which would take the British economy back into growth by the Spring of 2010. This is the V shaped recovery which everyone, not only in London, is hoping to see. As it is unlikely that the British economy will have so strong a recovery in the year from mid-2009 to mid-2010 unless there is a strong global recovery, we can take the V shaped recovery as the Bank’s forecast of the major world trend.
The Governor qualified this relatively optimistic forecast by discussing the “paradox of thrift”. “In the longer term,” he said, “the national savings rate will have to go up. In the short term, if it were to rise now, we’d be in an even deeper recession.” The recession happened because of the mishandling of debt, both in Britain and in the United States. Yet, on this argument it is necessary to create an environment of higher spending, lower saving and rising debt, if the world is not to be sucked downwards in a deflationary spiral. We have to do all the wrong things in order to achieve short term recovery. This is against a Central Banker’s instinct. Indeed it puts the short term ahead of sound longer term finance.
The Bank of England is preparing to embark on “quantitative easing”, in order to turn round the recession in the period 2009-2010. This scares everyone. Neither the United States nor the Eurozone has embarked on quantitative easing – nor indeed has Britain, as yet. The Governor’s actual words were: “When it comes to being able to do a wider set of operations involving the Monetary Policy Committee, I’d like to think that when the M.P.C. meets, it will be in a position do to that.” The Monetary Policy Committee will next meet on March 5th, so Britain may be only three weeks away from an experiment of a computer generated money supply increase. The money will not need to have been printed, but there will be an addition to the U.K. money supply. Flat money will have become virtual money, or perhaps one should say that virtual money will have become flat money. This scares me, and I think it scares most people.
The best hope is that the recovery in the 2009-2010 period will actually occur. The model for the Recession of 2008-2009 has so far been the Great Depression. The Great Depression started with the Wall Street panic of October 1929. The low point came in the middle of 1933 if one measures in terms of growth of G.D.P. The present Recession started in August 2007, with the first freeze of interbank lending. From start to trough in the Great Depression was about eleven quarters. If the present Recession lasts for eleven quarters from the beginning to the trough, then the trough will come in the first half of 2010.
That would be nine months later than the Bank of England forecast, and it would suggest that a return to growth would come in 2010-2011 rather than 2009-2010. But perhaps many of us would now settle for that.
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