My father, who at one time was an education minister in the Kenyan government,used to tell a story of a long-forgotten crisis when the leaders in the educationalestablishment could only turn to him and ask: ”minister, what shall we do?” The point of the story is that these were all highly qualified senior academics, while myfather had left school at 16 with no qualifications at all. It amused him.
We have perhaps in the last week seen three instances of the same thing: expertcommittee men exhausted of ideas, despite their towering intellects. I refer to BenBernanke’s Jackson Hole statement which said nothing; David Cameron’s statementat Prime Minister’s Questions, when he was reduced to that old stand-by “cure” foreconomic stagnation (building more houses); and then on Thursday we had MarioDraghi resorting to buying time by talking borrowing costs for Spain and Italy down on the conditional promise of some bond buying. None of them had anything new tooffer.
The Federal Open Market Committee, the senior civil servants in Whitehall, and theGoverning Council of the European Central Bank are all intellectually at sea. Theyhave deluded themselves with Keynesian fallacies, believing animal spirits must berevived. “Animal spirits” is code for not understanding the fundamental purpose of free markets. Instead, governments and central banks blame market irrationalityand seek to manage them to promote economic growth. They then wonder why it allgoes wrong.
Here is the true situation: unrealistic asset valuations, the result of zero interestrates, have strangled progress. Note progress, not growth: this is deliberate. Theresult is that markets no longer work effectively, so it is impossible for the economyto advance. Governments and central banks cannot face up to this reality, becauseover-valued assets are collateral for record levels of debt that have accumulated over the last 50 years, the result of government-sanctioned expansion of bank credit.
The authorities misdiagnose economic problems because they believe in economicstatistics that are wholly fallacious. The most important of these is gross domesticproduct, and I was heartened to see Toby Baxendale of the Cobden Centre make thisvery point. I go further in denouncing GDP: it is no more than a money-total that canbe pumped up by government intervention and bears no relationship with economicprogress. If GDP had been invented earlier, no doubt Rudolf Havenstein – Presidentof the Reichsbank in 1920-23 – would have claimed spectacular economic growth,purely based on money-printing running ahead of price inflation. We know how thatended. This is statistical growth for you, not economic progress. Think about it,because this is precisely what central bankers do today, and they pass it off asresponsible economic policy.
Markets need to clear over-priced stock, assets and unsustainable debt. Gettingthere by inflating the problem away, which is essentially what central banks aredoing, only destroys the savings necessary for genuine economic progress. It is aconfused policy of making us wealthy by destroying wealth. It seems extraordinarythat this simple fact has escaped the combined mental capacity of all those highlyqualified committeemen and civil servants.
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