Central bankers have their own agendas. Citizens must make their own arrangements.
Around the Western world, the shape, speed and proximity of Apocalyptic Horsemen are becoming clearer. This is a relief, in that there were bits of the jigsaw missing until the last few days. Now, they seem to me to fit quite nicely.
Here is the mainstream media/ political line:
‘Everyone who’s a Western central banker would like to keep interest rates down. The Asia-Pacific rim economies would like them to go up, as they have an overheating problem – whereas in the West, we have a near-freezing point problem’.
The problem is that this doesn’t marry up with the empirical situation out there. Bernanke is employing economic stimulation, Osborne is cutting Government costs, and Trichet is warning he may put rates up in April.
But the reality remains that they all fear the same horror – they just have different local motives.
Let me explain my reasoning.
They all know rates mustn’t rise too much – otherwise bad interest rate derivative bets will sink the whole financial system. The local difficulties are as follows:
Bernanke. He has the biggest deficit problem. If rates rise, taxes will gradually become nothing more than a way to get citizens to fund the debt. Politically – even systemically – this is unsustainable: a normalised interest rates environment would mean that 30% of all US taxpayer monies would go to servicing the American debt. Therefore Ben will do, say, invent and generally see anything in the data that says ‘keep on keeping the rates low by buying all the banker bad debts’.
Osborne. His banks are the most wobbly. When I say ‘his’, I mean the two millstones owned by the Government. The ownership isn’t particularly onerous, but the liabilities are frightening. Nobody – but nobody – has made worse bets than RBS; and exposure by UK bankers to Irish and Russian fantasy property isn’t good either. Also, the British Chancellor has a unique problem, in that his boss David Cameron seems happy to accept any level of banker bonus, because the whole subject bores him, for goodness sake.
Osborne’s Treasury is also the most empty. Thus he doesn’t have the stimulation option. Further, he has spotted that public hatred of the bonus bonanza is about to explode. So he has (a) flooded the MPC with people willing to keep rates down, and (b) started taking a populist line on banker excess.
Trichet. His problem is entirely different. A French central banker who always knew privately that the game plan was to keep the main players rich and the richest player (Germany) paying the bills, Trichet must please a German leader anxious about the average voter’s dislike of bailing others out – and a French leader desperate for German support of his country’s lifestyle to continue indefinitely.
There is only one way he can achieve this objective, and that’s to hike interest rates and thus bankrupt the debtor EU members. Despite media utterances to the contrary, Tricky Trichet’s local objective is to force the ClubMeds and former Soviet satellites to leave the Eurozone. In public, he will continue to express regret about this. Until next October that is, when he must hand over to another plucky person, and retire.
In truth, all of them are merely courtiers to King Canute, insisting that the waves can be held back. I still insist that they can’t be, for two reasons:
1. The Asian economic diktat (and the Chinese local economy/US debt agenda) insist on higher interest rates. This is being presented by the media as a delicate balance to be maintained, but in real life that’s bollocks. The American debt is so big – and the Chinese economy’s need to slow down so urgent – this is a circle that cannot be squared.
2. Without completely taking the banking derivatives sector to one side and burning every last bit of paper, the destruction wrought by bad bets on interest rates will be ten times greater than the typhoon that sunk Lehman.
The underlying assumption of this charade is that push will never come to shove – but history teaches us that it always does. Adding velocity to this certainty is the gratuitously pernicious effect of what Harold Macmillan called “Events dear boy, events”. The Arab Spring having pushed up the price of oil, Western economies showing little or no growth are left with just one way to defend the credibility of their currencies: higher interest rates.
As you can see, there is no real alternative to every citizen making his or her decision about how to survive. My preferences are gold, the countryside, high walls, and a gun. Taking gold as the only one seriously suggested, it remains hard to get hold of the real thing…and then you have the cost and hassle of storing it. But it is still the only thing which – when revolutions make energy supply uncertain, and governments are drowning in debt – keeps on going up and up and up.
With ready cash available, then property and land (if there are renters available) remain the obvious choices for those able to take the long view. Most people can’t, and so the best answer is a combination of shrewd shopping, sweating an allotment somewhere, and voting for economic realists.
I am not and have never been a doom merchant: I know people think I am, but that’s because they can’t deal with an unthinkable reality. I doubt very much if things will come to social breakdown; my commonsense tells me that even the lunatics running this asylum will sooner or later realise that broadscale write-offs are the only answer.
But we do need to get real and accept that – in many places – by the time that truth has been accepted by the key players, political institutions and systems we take for granted today will have gone forever.
The Slog 