The west wants the Chinese to raise the value of its currency here and now, but Beijing seems unwilling to snap into action
Assiduous readers of the financial pages will be aware that last week's annual meetings of the World Bank and International Monetary Fund in Washington – which I attended – were not harmonious affairs. Broadly speaking, there was a huge division between the western industrial countries, led by the US, and China over the question of the appropriate level of exchange rates at which countries should trade in what is known, in that otiose and clichéd phrase, as the globalised world.
Not to put too fine a point upon it, the view of the western group is that China is pursuing mercantilist policies, keeping its exchange rate too low and deliberately obstructing a sensible, necessary rebalancing of the world economy under which balance-of-payments surplus countries would allow their exchange rates to rise – thereby encouraging imports, and enabling western economies to produce and export more (because they would be subject to less subsidised competitors).
An essential part of the rebalancing would involve the deliberate stimulation by China (principally), and other surplus countries, of domestic demand so that they would be less reliant on exports.
At this stage, I should point out that the mighty German economy, although part of the west, is generally included in the category of surplus countries, although its policymakers have a Chinese-style reaction to suggestions that they rely excessively on exports, and do not do enough to stimulate domestic demand, and hence, imports.
Now, the message from the Chinese delegation in Washington was that they were not against rebalancing, but that these things take time. They would make the desired adjustments in due course, but history shows that the completion of certain courses takes time – indeed, generations. The problem is that the west (with or without Germany) wants action here and now.
Another Great Depression has been avoided – so far – but although there have been the beginnings of a recovery, output is way below potential and unemployment is far too high.
Even the more optimistic forecasts indicate that output in the US, UK and the eurozone will grow from now on at less than the rate required to prevent unemployment from rising. This is what economists call a growth recession and, given the social implications, I myself should be tempted to put more of the emphasis on recession than growth.
The other theme of the annual meetings, and of the various on- and off-the-record sessions that accompany them, was, inevitably, the degree to which regulatory reform had progressed. The general view was that we were, to use one central banker's phrase, nowhere near an adequate reform of the system. This meant that there was plenty of interest in the report by the Group of Thirty entitled "Enhancing Financial Stability and Resilience – Macroprudential Policy, Tools and Systems for the Future", as well as in the G30's pamphlet "Twelve Market and Government Failures Leading to the 2008-09 Financial Crisis", by the Spanish economist Guillermo de la Dehesa.
The G30 is a very high-powered "consultative group on International economic and monetary affairs", and the chairman of its board of trustees is none other than the redoubtable Paul Volcker, former chairman of the Federal Reserve board, and currently also chair of President Obama's Economic Recovery Advisory Board.
The G30's particular interest at present, macroprudential policy, is a catch-all term for all the official efforts going into reducing the kind of systemic risk which brought us the current debacle. It is a worthy cause but there is still a glaring omission – namely the need to devote more attention to the deficiencies in corporate governance which allowed figures such as Sir Fred Goodwin of RBS and Adam Applegarth of Northern Rock to run riot with other people's money – and, ultimately, jobs.
For all the efforts that are being put into reforming the system, one's general impression is that the casino is alive and kicking, with only a few minor security checks at the front door.
And the casualties of previously lightly regulated Casino Capitalism? They are not in such good shape. The governments that should be looking after them remain in thrall to the bond market vigilantes and the ratings agencies – ratings agencies which ought, on their record, to be put firmly in the sub-prime category.
As they pay heed to these false prophets, governments such as our ill-matched coalition have resorted to what Dr Johnson might well have described as "a last refuge of the scoundrel". When he made that famous jibe, Samuel Johnson was referring to patriotism. In this context I am referring to the way that those who urge drastic cuts in the budget deficit now cite the need to protect "the next generation".
The important point is that the next generation is already in front of our eyes. It is young, in its late teens and early twenties, and already experiencing alarmingly high rates of unemployment. The cuts programme is guaranteed to make the situation even worse. This is socially wrong, and potentially explosive. When ministers say "it is the right thing to do", it is right only in the sense that it is rightwing.
Copyright Speakers Corner 2017