Froth paid for with debt

published 31 January 2013

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.

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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?

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.