《卫报》：G20都市神话与横加干涉

There are a couple of unpalatable facts which it is vital for the leaders assembling in London this week to understand if they are to tackle this financial crisis effectively.

The first is the cause of the crisis (no doctor would attempt to treat a patient without first trying to diagnose the cause of the illness). That's easy. The crisis was caused by bankers' greed, and the evils of the bonus system. This led to banks lending too much to subprime borrowers and trading in an alphabet soup of derivative and structured credit instruments such as CDOs, CLOs and CDS. So all governments have to do is recapitalise the banks, get them lending again, pillory some bankers, and the problem's solved.

Sadly, this urban myth gets nowhere near the root cause of the problem. The credit bubble, the puncturing of which has been so cataclysmic, arose from a series of policy responses primarily, but not exclusively, from the US Federal Reserve. Every time the market has been in difficulty, from the crash of 1987 to the dotcom bust of 2000-03, the US authorities rushed to the rescue, cutting interest rates and taxes to stimulate demand and make investments look cheap.

By not allowing the market to experience the inevitable consequences of a downturn, the actions of the authorities led to soaring credit creation and asset price inflation, the collapse of which is now much more painful than any of the downturns they prevented would have been. As we can see from this, interfering with nature is a dangerous thing. Yet that is the policy response which is now being maintained. By propping up bust banks and auto manufacturers, the authorities will merely prolong the inevitable agony.

What is more, they haven't thought about what caused them to adopt those inappropriate policies. The major problems in the western economies had one big cause: the deflationary shock caused by Asia and, in particular, China's emergence as a low-cost manufacturer. This deflationary influence on the cost of goods collided with a political imperative to maintain western jobs and living standards through lower rates of interest and lax credit in order to enable consumption to continue.

Even if the G20 manage to fix the problems in the financial system, which seems unlikely, demand will not return to its former level. Without strong domestic demand in the surplus countries, and in particular China, there will be a capacity overhang. This is colliding with the long overdue and demographically vital savings/expenditure adjustment in western economies which will lead to a depression.

Unpalatable fact number two is about the creditworthiness of governments, which is partly expressed through their currencies. Many governments have had to guarantee their banks' obligations in order for their banking system to survive, and monetary policy has moved on from the conventional up through the gears via zero interest rates to so-called quantitative easing.

The effect of quantitative easing - the purchasing of securities by the central bank - can be gauged in its popular description: "printing money". It inevitably risks a debasement of the currency and inflation. Which brings us to another important fact G20 leaders should bear in mind: when did America leave the gold standard? The gold standard was what ensured that there was a fixed amount of gold held for every paper dollar in issue. Once it was abandoned, the world began its experiment with a fiat reserve currency, in which the only thing that made anyone believe $1 would buy a particular amount of goods was because the Fed said it would.

So how long has the US been off the gold standard? Most people seem to assume that this occurred as a response to the Great Depression, or as part of the recovery from the second world war. In fact the gold standard was abandoned in 1971, by executive order of Richard Nixon. Not only does this seem shockingly recent, it also suggests that the bull market conditions that began in the early 1980s followed this abandonment. Maybe the conditions of the past quarter-century were far from "normal" (to which everyone seems to want to return) but an aberration caused by this.

Meanwhile - as the leaders of China and Russia seem well aware - the US has embarked upon an experiment which is likely to lead to the debasement of the world's reserve currency.

Terry Smith

The Guardian