BANK of England Governor King is going into retirement a worried man – that his successor, the Canadian banker Carney in alliance with a badly rattled Osborne and Cameron, are going to opt for inflation and crashing the pound as a way to increase exports and further slash wages, in a desperate attempt to revive their failing economy.
King began his speech to the CBI in the north of Ireland by outlining the current situation.
He said: ‘Living standards have been squeezed for longer than at any time in living memory.’ There were three factors involved. ‘The first is an especially deep and protracted squeeze on the level of many people’s real take-home pay. . . On average, real take-home pay is no higher than back in 2004.
‘That has been responsible for an unusually weak recovery in consumer spending which, after falling initially by some 7%, is still more than 4% below its peak. The result is a large number of vacant retail premises – visible here in Belfast, as elsewhere.’
He added: ‘The second factor is the extent to which the balance sheets of the major UK banks had grown before the crisis hit, and had been financed primarily by borrowing. So the subsequent reduction in bank lending – the deleveraging – was greater here than in many other countries. That deleveraging has as its counterpart a reduction in the amount of (broad) money in the economy and a reduced willingness on the part of banks to expand lending to finance the recovery.
‘And the third is the crisis in our main trading partner – the euro area – where the near-term outlook is weak, and uncertain.’
Pointing to the Labour-Coalition rescue operation for the banks he stated: ‘The Bank’s programme of asset purchases has prevented what might have been a serious contraction of the money supply. An enormous amount of new money has been injected into the economy, now amounting to about 25% of annual GDP. This was crucial in avoiding a depression.’
He asks: ‘So should we do more to revive the patient? The short answer is yes – but the harder question is, what?’
He warns: ‘And, as with many medicines, there are side-effects from the prolonged use of monetary stimulus. . . A long period of exceptionally low interest rates may also encourage excessive risk-taking, leading to vulnerabilities in important financial institutions. . . The right prescription now is a programme that complements monetary stimulus with measures to promote the necessary long-run rebalancing of the economy, enabling us to return eventually to more normal levels of interest rates. Only then can we return to a sustainable growth path. We must not be inactive, but we must be selective in order to be effective.’ Go cautiously says King.
He continued to warn: ‘There is only one simple test of whether UK banks now have sufficient capital. It is whether they can convince investors that it is safe to provide them with funding at reasonable spreads over Bank Rate without central bank support. As the Financial Policy Committee (FPC) noted in its recent Review, UK banks are still some way from being able to convince the market in this respect.’
He adds: ‘Engineering a recovery while our main trading partner is in a downturn is a difficult undertaking.’
Urging patience, King warned against inflating the economy – ‘The painful experience of the 1970s came at a terrible price for working men and women in this country. . . Wishful thinking can be indulged if the costs fall on the dreamers; when the costs fall on others, it is unacceptable. . .
‘So a long-run target of 2% inflation should be an essential part of our macroeconomic framework . . . It would be irresponsible to lose that. . .’
The alternatives, deeper austerity or rampant inflation are both at the expense of the working class and the poor. For the working class there is only one way out of this crisis – through carrying out a socialist revolution.