In his final press conference of 2011, Mervyn King, part time Governor of the Bank of England and full time Dame Edna Everage look-a-like, wished journalists and consumers alike a merry Christmas, and a “systematically stable 2012”. It was a wish, not a promise because, despite his lofty position in monetary circles (or coins as they tend to be called), he is not the master of the house, nor the keeper of the zoo. King, Blankfein, Obama, Hu – they are all at the mercy of the global invisible hand. A hand which Alan Greenspan, a man that my sixth-form economics teacher absolutely adored (sadly, the course finished in mid-2007), said of recently:
“With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.”
This is indeed a fun game, with limitless possibilities. With notably rare exceptions, (the British Medical Association, the majority of GPs, and House of Lords, for example), the Health and Social Care Reform Bill is widely supported by the medical profession. Similarly, with notably rare exceptions (2003-2010, for example), Roger Federer has had an underwhelming career.
The Bank of England was granted independence* by Gordon Brown or Tony Blair, depending on whether you voted for Ed or David Miliband in the Labour Leadership Election, at the beginning of Labour’s first term in office. It was a shock and awe move, designed to wow the sceptical markets into trusting Labour with the economy. The Monetary Policy Committee was set up, and given a mandate to target inflation of 2%. There was a margin for error of 1% either side, but if inflation slipped below 1% or above 3%, the Governor of the Bank of England would, like an apologetic public school boy after breaking the chapel windows with an errant free kick, have to write a letter to the Chancellor of the Exchequer, explaining why he had screwed up.
With notably rare exceptions (April 2007-present), Mervyn King has not had to write such a letter. Since April 2007 however, King has had to write a plethora of letters to the Chancellor, explaining why inflation had (usually) overshot the mark. The naïveté and arrogance of this charade is almost adorable. Not Andrex puppy adorable, more like young child with chocolate all over its face adorable, because the clean up process has been protracted.
The British Government tried targeting full employment. It failed. It tried GDP growth. It failed. And, like a game of economic indices spin the bottle, it tried inflation targeting. And it worked. The UK enjoyed 43 consecutive quarters of economic growth under inflation targeting. This really was the Holy Grail – strong economic growth without the accompanying high inflation. Presumably, this wasn’t because the Governor was so terrified of writing to Gordon Brown, nor because he was an economic wizard, nor even because the Chancellor had abolished boom and bust. It was, rather drearily, a result of a combination of hundreds of factors, from cheap manufactured goods from China, to global banking deregulation, and so on. Of course these global imbalances that had kept inflation and interest rates down, and therefore growth up, eventually led to the greatest economic and financial crash since the one in black and white. It wasn’t so much a case of the emperor is wearing no clothes but rather the emperor got pissed as arseholes and sold all his clothes for a plastic singing fish in a pique of drunken materialism.
The letters that King has sent to the Chancellor are a gentle reminder of the arrogance of the 1990s, when we thought we had perfectly manicured the invisible hand; we thought we were in control. It’s comforting to think that one is in control, or at least that someone is. That’s where the power of conspiracy theories emanates. It’s much easier to think that Princess Diana was murdered by Prince Philip, because Prince Philip doesn't give a damn about you. A car crash? That's unsettlingly possible. Or the terrorist attacks of 9/11. If it’s an inside job (Bush, the Israelis, Alex Ferguson), then it was by design and therefore avoidable. If it’s just two dozen horny Saudis, a couple of steak knives and those flying lessons you get from your rich uncle on your birthday, that’s chaotic and terrifying.
And that’s what the last few years have been. The future depends on a US-led recovery, a soft landing in China, a stable Eurozone, and maybe even some new technologies. It also depends on Mervyn King, but not very much. Sorry.
* Not quite independence, closer to devo-max, but what's monetary independence between friends?
