Froth paid for with debt

In this week’s interview with Bernard Connolly, we talk a good deal about the horrors of “internal devaluation”. This is a euphemism for pushing down wages inside a country until its products are competitively priced enough to sell abroad in quantities sufficient to eliminate a trade deficit.

A euphemism is required because the consequences of internal devaluation are nasty. Falling wages mean falling domestic demand, and by extension high unemployment. They also mean rising relative levels of debt (your wages fall but the interest due on your mortgage does not) and an inevitable rise in bankruptcies and foreclosures. It is nasty stuff.

It also isn’t guaranteed to work. You can read more on this in the interview, but the upshot, says Connolly, is that even in theory “there may be no economic solution” to the underlying problems of European monetary union.

This isn’t the kind of thing that many economists say – they usually have an answer for everything. Just look at the many prescriptions for Britain and its hopelessly bad growth numbers (the economy has now contracted in 12 out of the last 18 months).

You will see that some economists think that all we need is more in the way of credit-fuelled infrastructure projects. Some think the answer is to get rid of the Bank of England’s inconvenient inflation target – our incoming Bank of England governor Mark Carney apparently thinks monetary policy is far from “maxed out”.

Some think we need to force our banks to shut down zombie companies and open the credit floodgates to better prospects. Some think it is just a matter of spending more money we don’t have on everything and anything. Others want to slash taxes and hope for the best.

But here is a thought for you. What if none of these things will really make much of a difference in the short or even the medium term? The key point here is that what a lot of people thought was real growth in the years leading up to 2008 was nothing of the sort. Instead, it was, as Anthony Hilton puts it in The Independent, an illusion – “froth paid for with debt”.

It is therefore entirely ludicrous to measure today’s growth against growth in, say, 2007 and 2008. And ludicrous to claim that the current government’s policies are a failure because they haven’t been able to return us to a level of growth that never really existed in the first place. It may be that there is no economic solution to the perceived problem of our lack of growth. Wouldn’t it be nice if our economists stopped pretending that there is?

5 Responses

  1. 31/01/2013, Romford Dave wrote

    There are still those extolling the virtues of the US economy powering ahead (apparently) seemingly oblivious to the multi $Trillion Bernanke binge that funded it.

    The quicker they all start praising the upside of a downgrade in growth expectation, the quicker it will become the accepted reality.

    Target 0.01% deflation and we’ll all be better off, even if there are some that don’t realise it.

    At least the planet will thank us.

  2. 04/02/2013, asocialdemocraticfuture wrote

    Rather a counsel of despair. The economy can and must grow by more than 2% a year in a balanced and sustainable way. Building improved transport and other economic infrastructure along with affordable housing in an effective and efficient way whilst encouraging entreprenurial activity must be part of the solution. Ideas, such as exporting our health intellectual capital as reported this week, another. Thinking out of box is required, rather than the pessimistic obverse of the noughties hubrisw that the economic cycle had been banished!

  3. 04/02/2013, Romford Dave wrote

    brilliantly simple concept it seems unimaginable that no one has thought of it before!

    Oh wait a minute……

    They have.

    Loads of times!

    Did you ever see the movie with the clip “Hey oddball, why don’t you knock it off with those positive waves” in it?

  4. 04/02/2013, asocialdemocraticfuture wrote

    Britain has under invested in housing production and economic infrastructure in recent years. Escape from the last 1990-92 recession was largely driven by private consumption rising as interest rates fell after liberation from the ERM, then morphed into a debt financed binge. Production needs to lead consumption, rather than vice versa. Not simple to do properly; cutting public investment during a recession, as is now happening is usual line of least resistance default; of course, by raising it will not be enough. Need new models of delivery and financing. Hence the need for thinking out of box. Any constructive ideas, Dave?

  5. 04/02/2013, Romford Dave wrote

    Just the same old same old, that no one really wants to hear or pay any attention to.

    i) Let failure be the inspiration and
    ii) Beware of moreness.

    Not really the snappy buzzwords associated with blue sky out of the box left field thinking people have come to expect from those that usually lead us in to the valley where the 600 went before I guess, but there’s a reassuring old school simplicity in allowing those who fail to fail don’t you think?

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