I was attracted to a lecture at the LSE last month by this provocative title. For a senior bank official to publish such a book, is somewhat more serious than the infamous note with the same sentiment, left by Liam Byrne as he quit the Treasury in 2010! This is from Stephen D. King, HSBC’s Group Chief Economist and the bank’s Global Head of Economics and Asset Allocation Research. He was launching it at the LSE to an audience of economic students, dons and public for nearly two hours including questions. So, we thought, he must know more than the rest of us about what’s ‘up ahead’! We weren’t disappointed.
King’s underlying analysis is that the current stagnation of Western economies threatens to reach crisis proportions in the not-so-distant future. He argued that the phenomenal growth rates of post-war decades will not return and that even the low single digit average growth rate since 2003, looks optimistic to expect in the future. In his view, this huge reduction in economic activity is unlikely to be reversed even by high levels of public spending. He questioned whether even the continuation of ‘Quantitative Easing’ (i.e. money printing) policies of US, UK and other central banks to avoid a 1930s-style slump, would succeed beyond their initial success. The US Treasury seems to have come to the same conclusion, to the consternation of the stock markets.
What was interesting also was his critique of orthodox economic theory. He argued that the absence of historical perspective in most economists’ university training, has made them ill-equipped to learn the lessons of past crises. He therefore advocate much greater focus on economic history, than the current syllabuses’ reliance on the mathematical models. . They had so failed to spot the signs of the present financial crisis. Remember the Queen’s very same question to an assembly of top economists! I very much agree with this. Interestingly, no one in that audience of economics students or dons, argued otherwise.
But his message was much tougher for the establishment generally. Not since John Maynard Keynes, in the 1930s, has such a senior UK economist warned of the dangers of such a lengthy wage freeze as workers in the western economies have recently endured. He described it as the greatest redistribution of income to the asset and cash rich since the nineteenth century. The implication was the wealthy classes and employers must accept more taxation and allow more wage increases, if austerity policies are to continue.
To ram home this point, he gave two powerful historical parallels – the mishandling of the economy which gave rise to the French Revolution and the disastrous Snowden budget and clinging to the Gold Standard of 1931, which almost caused an uprising in Britain. The French case needs little illumination – with the vivid images of tumbrils it conjures ! King argues that the true circumstances of the Snowden budget is less well understood today, and that even Ed Balls, the Shadow Chancellor, who argued, ‘Don’t Repeat the 1930s folly’, in his critique of the government’s policies in 2010, has misunderstood the true lessons!
Philip Snowden (1864-1937), was the Chancellor of the Exchequer in Ramsay MacDonald’s short-lived Labour government of 1929-31. Despite the huge mass unemployment of the Great Depression (3million plus in Britain in 1931), he clung to the financial orthodoxy of the Gold Standard. This had overvalued sterling and made Britain’s exports uncompetitive (especially against cheap German coal, causing the General Strike in 1926). Snowden was attempting to reassure the financial markets and foreign creditors that Britain would not penalise them by devaluing the £, which was then a global currency. Instead of trying alternative policies (such as raising trade tariffs), he opted for the deepest austerity policies of a Committee on National Expenditure (20% cuts in unemployment benefit at a time of 20% rise in prices and 30% drop in GDP). ‘Snowden forced Britain onto a diet of cod liver oil and leeches.’ ['When the Money Runs Out'p102].
For King, that was a stupid policy, which austerity governments today, are repeating all over Europe. It showed the ‘political impossibility of maintaining a monetary arrangement that persistently imposed costs on British citizens even as the government attempted to maintain the UK’s credibility in the eyes of international financiers.’ [p102]
This attack on the benefits of the vast out of work classes caused a split in the Labour Cabinet’, as senior Ministers, lobbied by the TUC and the unions, refused to go along. However, MacDonald and Snowden formed a ‘National’ Government with the Conservatives and some Liberals and their ill-fated budget was implemented in September 1931. Following the government’s lead, the Navy cut the pay of the ratings by 25%, triggering a mutiny by the sailors – the Invergordon Mutiny. As King notes, ‘The stock market crashed, foreign investors headed for the exit and on 20th September, sterling left the Gold Standard’. [p99] Ironically, this reversal of orthodoxy policy proved the catalyst for economic recovery in the mid ’30s (shades of the 1990s forced exit from the EMS!). It relieved the threat of much wider social discontent, at a time when the appeal of German and Italian fascism was a serious worry in Britain.
King’s point (and though radical, he is no ‘New Dealer’ advocating Keynesian stimuli policies, but a fairly cautious banker), is that there are lessons from past periods of monetary and politically-entwined experiences, which should inform today’s debates. Although he does not spell it out, he clearly implies that unless British governments and wealthy classes are seen to share the burden of low economic growth, they might again face their ‘Invergordon moment’.
Whether he is right about that future for society under western capitalism (which he described as ‘the best of bad alternatives’), here is something to ponder for our current leading politicians, media commentators and employers. For a start, they might dip into ‘When the Money Runs Out’.