Comment: Can central bankers dig us out of Jackson Hole?

Comment: Can central bankers dig us out of Jackson Hole?

Ian Taylor, executive editor, TWgroupIt was a better day for the FTSE yesterday after billions were wiped off share prices last week, but then it often is on a Monday. It’s later in the week you generally have to worry about.

Still a 1% rise in the FTSE 100 index did not make things any worse and the stocks of the big two travel groups, Tui Travel and Thomas Cook, moved broadly in line with the market.

The big financial news this week – barring unforeseen events – will come on Thursday and Friday in the US when central bankers converge on Jackson Hole, Wyoming. Federal Reserve chairman Ben Bernanke will speak on Friday. His speech last year heralded the second round of quantitative easing (QE2).

The apparent steadying of stocks on Wall Street – at least up to midday Monday – came amid speculation, even the belief, that Bernanke will signal a new round of this: QE3.

No doubt Bernanke will say something to please the markets and all will be right as rain for a day or two. The problem is the impact is unlikely to be long-lasting given it has been tried more than once already. Indeed, the evidence suggests the previous rounds of quantitative easing did little more than stoke commodity prices – fuelling inflation.

So the markets might like it momentarily – since QE means more money to slosh around on the, er, markets – but it will also be likely to mean less money in most other people’s back pockets.

Analysts in the City predict “another couple of bad weeks in equity markets” and we will see more quantitative easing in the UK, too – “perhaps even as early as September”.

The Fed has already done its bit for market confidence this month, announcing that it expects to hold interest rates “exceptionally low”, i.e. close to zero, until mid-2013. That would make it five years when rates have been so low as to make lending at the base rate essentially a hand out.

Yesterday we learned, from the latest Markit household finance index, that almost 40% of UK households saw their finances worsen between July and August and “household finances in Britain are deteriorating at a faster rate than at the height of the recession in 2009” (The Guardian). Also yesterday, the British Retail Consortium reported a 2.6% drop in high street customers over the past 12 months.

Latest retail figures, released last week, reflected the pressure on UK high streets as households struggle to meet already rising food and fuel bills. The Office for National Statistics reported zero growth in the volume of sales year on year in July, with an increase in value of 4.3% - below the inflation rate of 4.4% or 5%, depending on your poison.

The figures look worse stripped of petrol sales, with the value of sales then 2.8% year on year. Strip out food sales and they look worse still - the increase in value on July 2010 reduced to 0.2%.

However, the key figure in the UK alongside those inflation rates and retail figures is that of wage growth – which for 80% of the workforce is below 2%. Household income is falling behind inflation month after month with no end in sight.

This is August remember – the quiet month, the silly season – approaching the third anniversary of September 2008 when all went pear-shaped with the failure of Lehman Brothers and four years since the collapse of Northern Rock triggered ‘the credit crunch’.

We are three years into the crisis and western economies are staring at what the Financial Times terms “Japanisation”. UK economist Graham Turner warned precisely of this outcome in his books The Credit Crunch (2008) and No Way to Run an Economy (2009). Japan, the world’s third-largest economy, went from boom to bust in 1992 and has never recovered – its economy sloping between stagnation and recession for two decades.

In essence, the Japanese government prevented the collapse of the country’s financial system at the expense of creating ‘zombie banks’ propped up with state support. Does this sound familiar?

I don’t know if there will be a “double-dip recession”, though I suspect there will. Saturday’s Financial Times appeared to suggest recession is already upon us, reporting: “A new recession – more accurately a prolongation of the old one – was always likely.”

The plummeting value of bank stocks last week betrays the markets’ fear that a repeat of Lehman Brothers is around the corner. The eurozone appears only a tremor away from a seismic collapse. The world economy is slowing, led by the US. The markets are subject to panic, and governments have exhausted their neo-liberal armoury of exchange rate cuts and quantitative easing, leading to serious discussion of letting inflation rip to bring down debt levels – a deeply destabilising prospect.

Governments and central banks succeeded in preventing the great financial crash of 2008 turning into a new Great Depression, yet they solved none of the underlying problems. The financial markets have operated for much of the time since as though the worst had been avoided. Increasingly it appears it has not.

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