Opinion

Anatole Kaletsky

Britain’s strength is its weakness

Anatole Kaletsky
Feb 14, 2013 16:19 UTC

Mirror, mirror on the wall, who’s the weakest of them all? As G20 finance ministers warn of the threat of a “global currency war” at their meeting in Moscow this weekend, two odd features of this looming financial conflict tend to be overlooked.

The first is that every country’s objective in this war is to “lose” by making its currency weaker. This is because a weak currency tends to support exports, employment and economic growth (if all other things are equal, which they never quite are). The second oddity is that the clear winner in this global currency war has not been Japan, Switzerland, China or any of the other usual suspects, but a country rarely accused of financial aggression: Britain.

Since the global financial crisis started in mid-2007, the pound sterling has been, by a wide margin, the weakest major currency. The Bank of England’s trade-weighted sterling index fell by a record 30 percent in early 2009 and, despite a modest rebound in 2010-12, it remains 24 percent below its level of mid-2007. Japan, by contrast, has endured a rise in its trade-weighted exchange rate of 60 percent from July 2007 to late last year, when Prime Minister Shinzo Abe committed his new government to a more competitive rate. Japan is therefore fully entitled to resent other countries’ accusations of currency warfare, when it has in fact been a long-suffering pacifist, exposing its export companies to the full burden of other countries’ post-crisis currency adjustments.

But let us return to the biggest “winner” in the post-crisis currency wars, Britain. Sterling’s devaluation has clearly been no panacea; Britain has done worse on most measures of economic performance since 2008 than any G7 country apart from Italy. That, however, may have been inevitable. London’s dominant role in international finance made Britain more vulnerable than any other major economy to the greatest banking crisis in history. And once that was over, Prime Minister David Cameron imposed on his country the toughest budgetary austerity in the G7. Whether this policy was wise is an interesting question, discussed in several previous columns. A more important issue today is what may happen next to Britain.

Recent events in the foreign exchange market suggest a possible answer. Since the end of last year the pound has weakened dramatically against all other major currencies, apart from the yen. The British and Japanese currencies seem to be falling for similar reasons. Those countries’ economies have experienced almost no growth since 2009, and their governments are becoming increasingly desperate to end this long-term stagnation.

A breakthrough speech on monetary policy

Anatole Kaletsky
Feb 7, 2013 16:01 UTC

Wednesday night may have marked the “emperor’s new clothes” moment of the Great Recession, in which the world suddenly realizes its rulers are suffering from a delusion that doesn’t have to be humored. That delusion today is economic fatalism: the idea that nothing can be done to break the paralysis in the global economy and therefore that a “new normal” of mass unemployment and declining living standards is inevitable for years or decades to come.

That such economic fatalism is nonsensical is the key message of a truly historic speech delivered on Wednesday by Adair Turner, chairman of Britain’s Financial Services Authority and one of the most influential financial policymakers in the world. Turner argues that a virtually surefire method of stimulating economic activity exists today and that politicians and central bankers can no longer treat it as taboo: Newly created money should be handed out to the citizens or governments of countries that are mired in stagnation and such monetary financing of tax cuts or government spending should continue until economic activity revives.

The idea of distributing free money to end deep recessions has been promoted theoretically by serious economists since the 1930s, when it was one of the few practical policies that Keynesians and monetarists agreed on. John Maynard Keynes proposed burying money in disused coal mines to be dug up by unemployed workers, while Milton Friedman suggested dropping money out of helicopters for citizens to pick up. Friedman also argued in a 1948 paper that governments should rely solely on printed money to finance their regular cyclical deficits. More recently, as conventional policies to revive growth have faltered, with widespread disappointment about the impact of zero interest rates and quantitative easing, proposals for distributing money directly to citizens have been quietly gaining traction among critics of orthodox central banks. I discussed this trend, sometimes described as “quantitative easing for the people,” in several columns last year.

Is the current market optimism justified?

Anatole Kaletsky
Jan 31, 2013 18:39 UTC

The U.S. economy has just suffered its first contraction since 2009, consumer confidence has plunged since November’s election and Americans’ paychecks are only just starting to reflect an increase in payroll taxes averaging $70 per month. Across the Atlantic, the euro zone and Britain seem to be sinking back into recession. And conditions in Japan have become so desperate that newly elected prime minister Shinzo Abe is openly devaluing the currency and threatening to take direct control of the central bank.

At the same time, stock markets around the world are approaching or exceeding records. Money is flowing into equity mutual funds at the fastest rate since the end of the last bull market in 2000. And business sentiment, as reported from Davos, seems to be more optimistic than at any time since the global financial crisis of 2008.

Is there a rational way to explain these contradictions? Will the business and market optimism be sustainable? Or is this sudden euphoria just another financial bubble, sure to be punctured if the grim message from recent economic indicators sinks in? The likely answer to all these questions is yes.

Cooperation isn’t coming to Washington – it’s already arrived

Anatole Kaletsky
Jan 23, 2013 23:50 UTC

The House of Representatives decision to suspend the U.S. Treasury debt limit is the most important political event in America since President Barack Obama was first elected in 2008.  As anticipated in this column immediately after the 2012 election, Washington seems to have broken its addiction to deadly games of economic chicken. That, in turn, should mean an orderly resolution of all U.S. fiscal problems and perhaps even an outbreak of bipartisan political cooperation, at least on economic issues, of a kind not seen in Washington since the early 1990s.

None of these favorable outcomes is yet acknowledged as true in Washington or Wall Street. Political analysts and market pundits have almost unanimously described the House decision as a diversionary tactic, simply designed to shift the high-noon confrontation with Obama to a new battleground more favorable to the Republican side: the March 1 date for automatic spending cuts under the sequestration procedure, or the March 27 expiration date of current government budgets.

This cynicism will almost certainly be proved wrong. The obvious reason is that an army in full retreat, as the Republicans have been since the election and fiscal cliff fiasco, finds it hard to regroup against an enemy enjoying strong momentum. And when such a battered force does attempt a last stand, this usually results in a rout. In this case, however, there are more specific reasons for the Republicans to seek peaceful coexistence instead of the fight-to-the-death over borrowing and spending that many pundits still predict. To see why House leaders decided to unilaterally disarm their nuclear weapons — first the fiscal cliff and now the debt ceiling — one has to understand the transformation in U.S. political dynamics that occurred the moment the votes were counted on Nov. 6.

David Cameron pushes his EU luck

Anatole Kaletsky
Jan 17, 2013 17:16 UTC

Editor’s note: After this column was published, Cameron announced he would be delaying his speech in Amsterdam due to the hostage crisis in Algeria.

Some think the prospect impossible. Many think the outcome inevitable. Most think the question irrelevant.

Will Britain pull out of the European Union or fundamentally renegotiate the terms of its EU membership?

2013: When economic optimism will finally be vindicated

Anatole Kaletsky
Jan 10, 2013 17:31 UTC

Will the world economy be in better shape in 2013 than 2012? The Economist asked me to debate this question with Mohamed El-Erian, chief executive officer of PIMCO, the world’s biggest bond fund. El-Erian is the author of When Markets Collide, a brilliant book that coined the term “New Normal” to describe the world’s inevitable descent into a Japanese-style era of stagnation after the 2008 financial crisis. I was delighted by the invitation because I wrote a book at about the same time, taking a very different view of the crisis – and many of my predictions finally look like they will be realized in 2013.

In Capitalism 4.0, I argued that the crisis would create a new model of global capitalism, one based neither on the blind faith in market forces that followed the Great Inflation of the 1970s nor on the excessive government intervention inspired by the Great Depression of the 1930s. While this new species of capitalism would doubtless go through a painful period of evolution, its character would be fundamentally optimistic because it would be driven by four historic transformations. Those transformations helped trigger the 2008 crisis, but their roots are in the demolition of the Berlin Wall in 1989.

First, the end of the initial wave of communism created a world that was unified under a single property-based economic system. Second, the opening of China and India added 3 billion producers and consumers to global markets. Third, the revolution in information technology made globalization possible by slashing communications and logistics costs. Fourth, the worldwide adoption of pure paper money ‑ money not backed by gold, silver, currency pegs or any other arbitrary standards of value ‑ allowed governments to stabilize macroeconomic cycles to a previously unimaginable degree.

The fiscal cliff deal proves Congress is working

Anatole Kaletsky
Jan 2, 2013 22:42 UTC

The U.S. fiscal cliff was dodged in pretty much the way that seemed most likely after November’s election: a bipartisan deal in which pragmatic Republicans, no longer focused on ending the presidency of Barack Obama, joined moderate Democrats to prevent economic sabotage by extremists from both ends of the political spectrum. On Wall Street, the immediate reaction was euphoria. But among mainstream economists and political commentators in Washington, it was cynicism.

While stock markets around the world approached their highest levels since the 2008 financial crisis, media headlines emphasized grim forebodings: Fresh stand-off looms after US cliff deal (Financial Times); Budget deal passes, debt ceiling looms (Wall Street Journal); Deal done but threats remain (Washington Post); Bigger showdowns loom after fiscal cliff deal (Reuters); House backs tax deal as next fight looms (Bloomberg).

Investors’ initial reactions are often misguided, especially to complex political events, but this time the markets will probably be proved right, and the pundits wrong. This week’s deal marked a genuine, and most likely sustainable, breakthrough for reasons of both politics and economics.

Is Japan set to lead after 20 years of torpor?

Anatole Kaletsky
Dec 19, 2012 16:56 UTC

As 2012 draws to a conclusion, it’s likely that the fiscal cliff will be averted, U.S. politics and monetary policy are irrevocably set, European politics are suspended until September’s German election and the Chinese leadership transition is over. In short, the political and monetary uncertainties that have obsessed financial markets and paralyzed business have all been dispelled. As a result, 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank. In one part of the world, however, events are moving the other way.

In Japan, economic and business conditions remain as dull as ever, but politics and monetary policy are suddenly exciting. And while the world has largely lost interest in Japan, the gestalt shift  in the world’s third-largest economy could have big implications for global business and for the way voters think about governments and central banks.

Last weekend’s landslide election of Shinzo Abe, a potentially powerful prime minister, was largely a result of his promise of a revolution in monetary policy designed to jolt the Japanese economy out of its 20-year stupor. If Abe delivers on his election rhetoric – still a big “if”, especially in a country where power is wielded mainly by bureaucrats rather than elected politicians – the global impact could be huge.

Europe needs Mario Monti more than ever

Anatole Kaletsky
Dec 13, 2012 00:59 UTC

Remember the euro crisis? For most of 2012, politicians, investors and business leaders were almost unanimous in their belief that the possible breakup of the euro would be a massive risk to the world economy. But today the euro is 5 percent higher against the dollar than it was six months ago, European stock markets have outperformed Wall Street by 11 percent in the same period, and Italian government bonds have been among the best investments of 2012.

The Nobel Peace Prize conferred this week to the European Union included three men who, under the EU’s byzantine institutional structure, are all entitled to be called “President of Europe.” With the award, it seemed as if the euro crisis might be almost over.

Silvio Berlusconi burst back onto the EU stage this month with his trademark chutzpah and slapstick timing, disparaging the technocratic government that has been given credit for putting Italy back on the road to financial prudence and thereby saving the euro.

Counterintuitive economics can help politicians

Anatole Kaletsky
Dec 6, 2012 02:32 UTC

Absurd wishful thinking. This is how most finance ministers describe criticism of their tough budget policies designed to control government debt and reduce borrowing. Britain, even more than Germany, has been in the vanguard of this austerity movement, as Chancellor of the Exchequer George Osborne demonstrated again in this week’s budget statement:

“Confronted with tough economic conditions, some say we should abandon our deficit plans, and try to borrow more – they think that by borrowing more, they can borrow less.”

For Osborne , this reductio ad absurdum seemed so conclusive that there was no need to justify his controversial economic beliefs.

  •