The risk of a second global recession within three years seems to be increasing by the day, and policymakers appear unable to come up with a coherent response. Now a new element has come into the picture: particularly in the US and EU, voters are impatient with the apparent lack of progress in dealing with the problems and are starting to put increasing pressure on politicians.
This is most obvious in the United States. The recent rancorous debate over the debt ceiling led many non-US observers to view the Tea Party as a lunatic minority -- "a small bunch of right-wing nutters", as Vince Cable so tactfully put it. In truth, the Tea Party speaks for a significant portion of the American public who have no appetite for the Obama government's tax-and-spend approach. (You don't have to be a Tea Partier -- or even a Republican -- to think that the current trajectory of US government spending is unsustainable in the medium term).
For the moment, the fiscal debate has quietened down, and the focus has shifted to US monetary policy. As the race for the Republican presidential nomination heats up, the candidates are taking turns to whack one of the party's favourite pinatas, the Federal Reserve. The most intemperate comments so far have come from Texas Governor Rick Perry, who in effect called for violence to be visited upon poor Ben Bernanke if he ever dares to visit Texas, and said that his advocacy of quantitative easing was "almost treasonous". Given the number of death warrants Gov Perry has signed during his years in office, Bernanke may have reason to worry. The other candidates have been quick to pile on, with both Michelle Bachman and Ron Paul claiming (correctly in Paul's case) to be Fed-bashers from way back.
The issue is no longer whether the Tea Partiers or Governor Perry are right about this. As things stand, the combination of Americans' underlying scepticism about government in general and the failure of the Obama government to solve the problems seems likely to limit severely the options open to the administration if things continue to deteriorate. In the meantime, the role of a previous generation of Republicans in creating the excesses that have led to the current mess stands to be forgotten.
Turning to Europe, this week's meeting between President Sarkozy and Chancellor Merkel seems not to have done much to address the Eurozone's underlying problems. The two leaders have agreed to work toward the establishment of an "economic government" for the Eurozone, but have stopped far short of introducing the Europe-wide fiscal policy, complete with new "Euro bonds", that the markets seem to want. President Sarkozy certainly favours that option -- as more than one commentator has suggested, France is four-square behind any rescue plan it can persuade Germany to pay for.
And that's exactly the problem. Chancellor Merkel is increasingly constrained by a political and public backlash at home against contributing any further towards bailing out their feckless neighbours. As in the US, the question isn't whether these views are right or not. It's plausible to argue that the cost to Germany of further bailouts is likely to be far less than the costs that would have to be borne if the Euro were to collapse. By now, however, Chancellor Merkel is afraid to make that argument, and as a result, the options available for dealing with the underlying problems are shrinking fast.
By comparison, the problems facing the Bank of England seem relatively simple, though that will change fast if the Eurozone crisis goes critical. Minutes of the latest Monetary Policy Committee (MPC) meeting reveal that Governor Mervyn King has seen off the dissenters who had previously called for higher rates. The latest meeting voted unanimously to keep rates at the record low of 0.5%. This time the dissent was in the opposite direction, with one committee member voting for an increase in the bank's asset purchase (quantitative easing) programme.
There's no sign yet of a Rick Perry emerging in the UK to utter threats against Mervyn King, but that could change if the Bank's gamble that inflation will start to fall sharply in 2012 fails to pay off. Retail sales data for July, released earlier today, underline the point that the main factor holding back retail sales is not unemployment or a lack of disposable incomes, but high inflation. In the meantime, government finance data for the fiscal year to date offer depressingly little evidence that the Government's austerity plans are working. It wouldn't take much more bad economic news for UK voters to become as stroppy as their American and German counterparts.
Just why is it that getting the world economy out from under this crisis is proving so diificult? One for the historians, perhaps, but here's a thought: what's being attempted is close to logically impossible. Policymakers are anxious to see the massive overleveraging of the past decade reversed, but they want this to happen without triggering a recession. Quantitative easing is an attempt to get banks to lend again, so it's inherently inconsistent with the long-term need to deleverage; and in any case the banks, scared by what happened a few years ago and of what may happen next, are reluctant to play along. Sad to say, the only element of the banking business that's been stimulated by all of that lovely cheap funding flowing out of the central banks is....investment banking.
The title of this posting is, of course, lifted from "19th nervous breakdown" by the Rolling Stones. You may recall that the next line is "only seems to make matters worse". Avoiding that may be the most we can hope for right now.
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