Despite missing the 2007 global crisis completely and despite dismal policy failures, economists’ predictions for 2011 were uniformly optimistic.
“The recovery is expected to proceed at a reasonably modest pace”
was what the CBI predicted in December, 2010, while as always, warning firmly about the one threat they obsess over:
“We now forecast higher inflation in 2011.”
As 2011 fades away, recovery appears remote, and inflation is expected to fall like a stone in January when George Osborne’s misguided VAT rise drops out.
I am no professor of economics; nor do I have a post at the London School of Economics, but in 2009, at a time when everyone was talking up the recovery, I warned, in an interview with The Times, that ‘ the worst of the slump was still to come’.
I was confident of this prediction because New Labour, Liberal and Conservative politicians were building a consensus around austerity – and had not yet tackled the root causes of the crisis.
So, smart Alec (I hear you say) what lies ahead in 2012?
My humble and not very cheering view is that because of the vast unpayable debts of the global private banking sector; because policy makers will not address the private banking crisis; and finally, because politicians wrongheadedly persist with austerity – we can expect things to get a lot worse.
This week I appeared on Newsnight with Gillian Tett of the FT and Louise Cooper of BGC Partners. We discussed our graphs of 2011 (see mine below) and wider questions around the global financial crisis this year – and how ecnomists and policy makers need to respond.
I was asked, along with 9 other top economists, to share my ‘graph of 2011′ with BBC Newsnight as part of their review of the economic year. I chose the chart above:
“This is the chart that struck me most forcibly, both for what it tells us about the debts of the private sector, in particular the private finance sector; but also because of what the Treasury chose not to tell us: that the public debt to GDP ratio is tiny compared to private sector debt to GDP ratio.”
Last week I appeared on Russia’s CrossTalk TV to discuss the Eurozone with James Meadway of the new economics foundation and Joost van Iersel President of the Europe Economic and Social Committee steering committee. Watch the video below:
With thanks to Nomura International Securities and Bloomberg
I have been banging on about how this is a global banking crisis, not a eurozone crisis, for some time now. So I find it poignant to watch European politicians and their advisers in Brussels, piling the pressure on their own shoulders and frantically sweating over a solution to “the eurozone crisis”.
The fact is the eurozone is a side show. This is a global financial crisis, and Graph 1 proves it. It shows the Credit Default Swap (CDS) Spreads on EU and US banks (hat tip to Uldis Zelmenis).
Last week I gave a talk in Brussels at a debate moderated by Pierre Defraigne, Executive Director of the Madariaga – College of Europe Foundation. It was ACitizen’s Controversy with Lars Feld, Professor of Economic Policy at the University of Freiburg and Member of the German Council of Economic Experts.
'Standard & Poor’s is just following events, not shaping them.' Photograph: Stan Honda/AFP/Getty Images
This is a piece I wrote for the Guardian in response to the S&P threatened downgrade of the Eurozone’s ‘core’ economies. The Guardian wanted a maximum of 600 words, delivered in a short time, so this was written hurriedly, and in the back of taxis ferrying me to TV stations. For this reason I have made a few changes this morning:
So European politicians want to shoot the messengers? Sure, ratings agencies haven’t always been reliable, decent or honest. And sure, like Eurozone politicians Standard & Poor is just following events, not shaping them.
But on this occasion S&P’s analysis, if not their solution, is right. Credit Crunch 2.0 is fast accelerating and squeezing life out of the real economy. The global (not just Eurozone) banking system faces insolvency. This private financial crisis impacts disastrously on the real global economy, and incidentally on the Eurozone.
But politicians – in the Eurozone and elsewhere – are not fixing the broken global banking system.
The Autumn Statement reveals but one thing: the Chancellor and his advisers are both ill-advised and dangerously ill-prepared for the forthcoming prolonged Depression. (And if you think I exaggerate, let me remind you that 20 years after the Japanese debt bubble burst, Tokyo house prices are still falling, and the stock market is worth 60% less than 20 years ago. And the Japanese economy was in a healthier state then, than the UK is today, thanks to an export surplus.)
Today’s penalising of the innocent – public sector workers, pensioners and those hundreds of thousands of young people entering the labour market - is a result of a deeply flawed economic analysis by the Chancellor of the causes of the global financial crisis.
With acknowledgements to the Economist: front cover 26 November, 2011
Dear readers…posted this last night, but failed to add links…so have updated this morning….And now at 12.54 on 28 Nov, following revelations from Bloomberg, am adding in a reference to the extent that Morgan Stanley was bailed out in 2008.
“was a bell-shaped metal grenade typically filled with five or six pounds of gunpowder and set off by a fuse. Unfortunately, the devices were unreliable and often went off unexpectedly. Hence the expression, where hoist meant to be lifted up, an understated description of the result of being blown up by your own bomb.”
Correct or not, this is a helpful analogy for the crisis of the Euro. The grenade that is the Euro has a fizzing fuse that threatens to explode imminently, causing visible panic in markets, in parliaments and treasuries across the world. Mainstream economists are either dodging the bullets and like the cowards they are, pretending that ‘it’s nothing to do with me guv’. Or else they’re panicking in ways that are crass and unhelpful, banging their heads against the brick wall that is the Bundesbank and ECB, and demanding that someone, somewhere defuses the bomb.
The Economist has a dramatic leader this week (“Is this really the end?”) warning of grave threats and offering Chancellor Merkel and other EU leaders ways of avoiding a comet-like crash. Like many others, leader writers on the Economist, somewhat belatedly, want the ECB to act as a central bank, and to provide liquidity to sovereign members of the Eurozone.
Greek Prime Minister Lucas Papademos assembles his new cabinet.
Because the crisis remains unexplained, it is unresolved.
Dear readers. This is a piece I have written with Douglas Coe for PRIME – Policy Research in Macroeconomics. Be warned: it’s rather long, more than 2,000 words. For some reason, the references do not appear within the text…but are inserted at the end of the piece….will seek advice, and ensure this problem is fixed. In the meantime, read on:
“As the world economy fails to recover, and instead threatens to implode we are now witness to political and social developments in Europe that are deeply alarming, even if inevitable. It is important that we understand and prepare for the implications of recent events.
The good news is that both politicians and official policymakers at the OECD and EU are finally forced to recognise the scale of the economic disaster that threatens social and political stability. The bad news is this has not led to any better understanding of the crisis, or to an admission of its causes.
