Kleinwort Benson: Central bankers in a HOLE
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BEN Bernanke’s recent admission at the Jackson Hole conference that “central bankers alone cannot solve the world’s economic problems”, which was echoed by others there, is very worrying on several levels. The first is that for the last 30 years, economic policy in the West has been run on entirely the opposite premise – that in fact, they could and would, solve all our economic problems. It was the inflationary 70s that persuaded politicians like Thatcher and Reagan that much firmer use of monetary policy was required. Central banks were given much greater powers and autonomy so that politicians should have less influence over the key levers of economic policy. For a generation, central bankers have raised interest rates to combat inflation and cut them again in order to boost demand in recessions. Yet now, faced with the worst crisis for 30 years, and with nowhere else to turn, the world’s key decision-makers are claiming they are not up to it. Secondly, it has historically always been the duty of all policymakers, be they politicians or central bankers, to maintain public confidence in the workings of the economy. The modern-day economy is built on trust, trust in the rule of law relating to contracts, trust in the value of money, trust in the banking system as an efficient, payments-processing system and as a repository for savings. At times of crisis, policymakers are ritualistically required to come out and state that there is no reason to be concerned, and that everything will be fine. It is necessary that they appear to be in control of events. Yet now, the central banks are clearly saying that the West has economic problems – a potential long term lack of demand, leading to persistently high unemployment – that look like persisting and that they have no idea how to deal with. There is no one at the top who feels prepared to project confidence in the system as a whole – this should be a cause for concern. Thirdly, and most worryingly, a vacuum is being created by the central bankers, which is likely to be filled by strange and potentially dangerous, ideas and people. Two ideas in particular, which failed dramatically in the past, may well be promulgated in the near future, as the central bankers hand back control of policy to politicians. The first is protectionism – at times of high unemployment, there is always some politician who will complain that foreigners are unfairly subsidising their export industries, thus harming domestic businesses and job prospects at home. The idea of taxing foreigners who do this has immediate political appeal – sadly the history of the 1930s shows that an initial protectionist move sparks a response and leads to a downward spiral as trade becomes increasingly difficult. The current juncture, with approaching US mid-term elections at a time of high unemployment and a large trade deficit with China, who continue to maintain an exchange rate against the US dollar which has barely moved for several years, is ripe for strident, political calls for trade measures against China. The second is the idea that the shortage of demand in the economy can be rectified by printing more money. In the early 1920s, as Germany began to move into hyperinflation, this was the official policy position. In order to maintain demand and hence employment, it was felt necessary for there to be sufficient money in the economy to cope with the shortage created by the need to offer more and more marks to obtain the same amount of foreign currency. Politicians and central bankers in Germany even used to boast about the efficiency of their printing presses in producing ever greater quantities of bank-notes! It is rare for those in public life willingly to cede responsibility for matters vital to government and to admit that they don’t know what to do- we should be worried that central bankers are doing just that. This note is intended to give an insight into the thought processes that lie behind our investment views and our investment strategy. They do not necessarily reflect the current investment policy of Kleinwort Benson. This note is intended for information purposes only and does not take into account the investment objective, the financial situation, or the individual needs of any particular person. Investors should obtain independent advice based on their own particular circumstances before making investment decisions. More articles in
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