"It's fair to say that if you look at the shocks impinging on us this is at least as challenging a time as back in the 1970s." — Charles Bean, Bank of England deputy governor, August 25 2008.
Charles Bean — who was Bank of England chief economist until taking over as deputy governor last month — said both of these things yesterday. He was speaking at Jackson Hole, Wyoming, during the annual conference of central bankers.
What are we to make of these two statements? And, more to the point, how much credence should we give to the Bank’s predictions? Let’s kick off with statement one. Bean reckons we’ll see subdued growth for a bit, but then it’ll all be OK again. He based this statement on the prospect of lower inflation next year (I agree with this prognosis) and more stable credit markets (I’m more sceptical on this one).
Statement one is the sort of thing a public figure says when he wants to sound reassuring. But — and this is quite reasonable, of course — Bean was unable to stick his neck out and say how long he reckons the pain will last.
Moreover he was at pains to cover his behind, lest he be guilty of sowing false hope.
"We’ve got our fingers crossed that things will improve," he said. "But there is the recognition that there is still a long way to go yet."
"Fingers crossed" just about sums it up for statement one. The Bank has as much idea as the rest of us how long this problem will last. Its people are, basically, hoping for the best — giving an outward impression of calm while dropping heavy hints that we should batten down the hatches.
On to statement two. Bean says the situation is at least as bad as the 1970s. I agree.
There are several parallels between our current situation and the 1970s, including:
- Disgruntled public sector unions demanding higher pay
- The cost of energy (especially oil) has surged
- The economy has ground to a halt
- We have an unelected Labour prime minister struggling in the polls, so desperate to find a way out he’d sacrifice the economy for any short-term respite
Except the depreciation wasn’t ‘managed’. After the Bank cut rates in March 1976, the pound went off a cliff — and took the economy down with it.
Callaghan took over as PM in April of that year. By autumn there was a feeling that he would call an election — despite everything, Labour was ahead in the polls. But he didn’t (remind you of Gordon Brown in autumn 2007?). No, Callaghan stayed on. And, by doing so, he got to add the IMF crisis and the Winter of Discontent to his list of ‘accomplishments’.
Today, of course, we have Gordon Brown — a desperate man leading a collection of increasingly desperate MPs. It seems Brown may be bounced into imposing a windfall tax on oil companies. This could have a real negative impact on Britain, especially if oil companies with headquarters here decide to set up home elsewhere.
But it would make headlines in the short-term, so Brown might well go for it. Desperate times call, it seems, for knee-jerk responses.
That, however, is a whole other topic. For today, let’s content ourselves with making sense of Charlie Bean’s speech. Basically, things will be better one day, but we don’t know when. In the mean time, they will probably be worse. We don’t know how much worse, but probably at least as bad as 30 years ago (which was bad).
Here at Fleet Street we don’t know how bad it’ll be either. But we want to be prepared for when we find out. That’s why The Fleet Street Letter is publishing a special report. It will look at a number of ways you can prepare for the damage ahead.
More on that this week...
"Oil consumption set to rise again," says Garry White
The USA has been consuming less oil. It’s a trend that Garry White believes is about to reverse.
There’s been a lot of ballyhoo surrounding recent commodities falls, as I’ve mentioned before. Garry reckons it’s all totally overblown.
"It’s easy to go on a diet for short time," he says. But can the US wean itself of oil any more? Indeed, will the current lower consumption levels persist?
Read on to discover Garry’s two main reasons why oil consumption is about to surge.
Until tomorrow
Ben Traynor
Editor
Selected articles:
Garry White on why oil consumption is about to surge.
Manraaj Singh on the next great commodity boom.
The Daily Reckoning — The need to live beneath ones means
"Wall Street, central bankers, economists, politicians — and most investors too — are betting on a soft landing," said a friend from New York. "A slowdown in world growth has taken the pressure off commodity prices. Slower growth will help keep inflation down, generally. And as long as inflation is no problem, the Fed doesn’t have to raise rates — which will keep the slowdown from hitting too hard."
Monday’s International Herald Tribune echoed the good news:
"World economies catch US malaise...pain of slowdown spreads far and wide, threatening businesses and growth."
You can read The Daily Reckoning in full here.
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