My New Year wishes

The world economic recovery remains fragile and could easily be derailed by renewed financial turmoil.

My first wish is a terminological one – please, can we find a more useful word or phrase to describe what has happened? The word “crisis” and the phrases “financial crisis” , “great financial crisis”, “Global Financial Crisis” , GFC, etc are losing all meaning. “The Great Recession” does not capture it either – it misses the focus on what really has gone wrong.

Also, a crisis is something that passes – a turning point, a phase where all the tensions in a situation reach a climax. This so-called crisis is continuing.

Further, what about all the other “crises” that have pockmarked recent financial history? We may have another one soon – is that to be labelled “crisis” also? If so, how shall we know which of many crises we are referring to? Some observers are already predicting GFCII (see below).

In fact, people have quite different things in mind when they refer to “the crisis” . This hinders rather than helps communication.

Worst of all is that people believe they are communicating something when they use the term, when in fact they are communicating nothing but noise.

But my main wish is that 2013 will bring the beginning of an understanding of the disease and its aetiology. It is generally good practice in medicine to form a diagnosis before treating a patient. But policy towards FinCR – the term I use to denote the Financial Crisis and Recession – has been to paper over symptoms and hope for the best. The same old remedies have been tried – notably new layers of regulation. These will do nothing to avoid the next financial collapse, and in the meantime they stifle bank lending and innovation. Central bankers admit they have lost their way.

At the end of 2012, sadly, there is as yet minimal recognition of the true nature of the disease among economists, governments or central banks. Nobody is listening. That is why we are stuck where we are.

Asked for her predictions for 2013, Dame DeAnne Julius, former member of the Bank of England’s monetary policy committee (she is honoured in today’s New Year’s honours list) , has pointed to the possibility of what she calls another global financial crisis – a “GFC II”. She gives three powerful reasons:

First, the world economy is fragile, with households and governments still struggling under heavy debts.

Second, both fiscal and monetary policies have “hit their effective boundaries” – i.e.governments have run out of policy ammunition.

Third, political weakness is undermining support for mainstream parties; this could see the beginning of the end of the euro, and trigger GFCII!

She describes what I call the money trap neatly. She calls rightly for international cooperation to reduce the risk of such another catastrophe. But like so many other commentators who nearly make the leap, she stops tantalisingly at the edge. Believers in fiat money can describe the trap we are in, they cannot point to any way out.

How many arrticles by  mainstream economists – for example, in the FT or in Project Syndicate website – on inspection merely describe the mess we are in? How many offer any solution, other than platitudes?

Very few.

What they do not face up to is this: if inflation targeting and its variants have failed, then the entire fiat money system confronts a mortal threat. For IT is not just one among many possible monetary rules – it is the one that all central banks own up to (whether or not they are open inflation targeters).  It is a profound crisis of the entire monetary system. What if it collapses?  Mainstream economists have no answers.

What they have to do is to make that imaginative leap to a new visiont of an alternative world order – one of a global monetary order. This is not utopian. It would have made sense to Adam Smith, Ricardo, Mill, Marshall and Keynes. It is the late 20th century faith in our ability to make money submit to the discretionary and arbitrary opinions of central bankers that is the anomaly. Central bankers – honourable people, though also interested in power – cannot admit they are facing the end of their dreams.

What could it mean to take that leap? It means a new diagnosis of the disease that afflicts the world – one that locates it as residing in the interstices of the international monetary and banking system.

Once that leap is made, it will mean setting the parameters of a healthier monetary framework. Yes, this must mean the sacrifice of a degree of national monetary autonomy, but that is the price to pay for reaping the benefits of globalisation. Yes, it will mean a new kind of banking, and ultimately a new definition of money itself. We need a money that is again redeemable for something of value – that has “fallback value”. It will be worth looking at gold again, as gold is known and trusted the world over. China and Germany are essentially, at heart, gold bloc countries. But however strong the pressure towards a gold-linked system may become, in my view there are superior options.

The best of all would be a money that gives everybody who holds it a claim on the future of the world’s economy and its potential flourishing. Only such a far-reaching reform of the rules of the game will give private business and households around the world renewed confidence to go out and start spending and investing for the future. This is the Ikon proposal that I outline in the book.

But even short of such radical solutions – necessary as they will be in the end –   the first step must be a recognition by major govenments of the true global dimensions of the policy challenges they face. That in itself would do wonders for confidence.

Happy New Year!