Wednesday, 26 September 2018

Which lunatics, which asylum?

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Politicians and central bankers need to think again, argues SwissInvest strategist Anthony Peters

AS THE EUROZONE crisis rumbles on, politicians – especially German ones – are flexing their muscles when it comes to the question as to who should be in charge or, perhaps more accurately, who is in charge.

The sovereignty of parliament is all well and good but how should lawyers with a solid grounding in family or labour law be qualified to scrutinise and to vote on matters financial of such complexity that not even the mightiest brains in global finance can get their head around it.

After all, we have central bankers who are armed with 20th century US economic theory which they are trying to apply to 21st century global economic problems. Not that many of them are not prepared to think outside of the box, but from thinking to being prepared to try something which defies traditional orthodoxy is a long journey and one which is too long for most of them.

It isn’t of course their fault that they have a toolbox full of imperial-sized spanners in a metric world but they appear to be happier to try and to fail with what they have available to them than to throw it all out and to start again. There appears to be an in-built reluctance to acknowledge that one of the reasons they are not coming to grips with the crisis in the economy is that they have, in military parlance, been preparing to fight the last war. They have the means to provide liquidity but that cannot provide solvency.

Politicians can provide neither, nor.

IT IS NOT as if there is a paradigm shift taking place. That happened a decade and a half ago when globalisation took hold, turned the old economic order upside down and China, along with the rest of south-east Asia, emerged as the manufacturing base of choice.

That the interpretation of the central banks’ respective remits on inflation targeting did not permit for the case of persistently imported disinflation is neither here nor there. I saw it and I was not alone but no central bankers seemed to be prepared to rock the boat by heading off to see their political masters and to tell them that what Bank of England Governor Mervyn King called “NICE” – non inflationary constant expansion – was not due to their own extraordinary prowess but the free gift in the cornflake packet.

All the while, the polis were happily basking in the reflected glory and also took their eyes off a ball which they probably couldn’t see in the first place through the deluge of tax receipts. Why should they? All the requisite boxes had been duly ticked.

Both the political class and the monetary authorities have shown themselves to be poor guardians of the economy

So, to some extent, both the political class and the monetary authorities have shown themselves to be poor guardians of the economy. Is this because they are institutionally incapable or is it because – as one chum of mine recently pointed out – orthodoxy won’t let them. We admire Copernicus, Galilei, Kepler, Newton and Darwin; not because they refined existing knowledge but because they leap-frogged it and threw it in the bin. Standing where we are, should we perhaps not be asking ourselves whether we ought to think about doing the same with currently valid economic theory and in consequence with monetary policy?

IN ITS FIERCE defence of the euro, the ECB has directly become an integral part of eurozone politics. In his article in Die Zeit of Wednesday, ECB President Mario Draghi wrote: “The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union.”

Doing “whatever it takes” is not an act of creating currency stability, despite what Draghi says; it is an act of geopolitical intervention. I am not trying to judge whether this is right or wrong. I am simply observing and clocking a fact. Voters should certainly be happier having the likes of Draghi and Weidmann controlling the process than some so-called lawmaker who as little as four years ago might have been running a bar in Venlo, a local council in Pordenone or handing out leaflets on Munich’s Marienplatz.

Fact is that something is horribly broken in the European – non only eurozone – socio-economic model and the time has come to consider something other than rearranging the deck-chairs on the Titanic. How about a spot of blue-sky thinking in both economic theory and political thought. As an old boss of mine once used to say: “If you don’t know where you’re going, you don’t know when you’re lost.”

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