By Martin Wolf
Is the UK on the road to disaster? Those who believe it is insist that it is mad to tackle a calamity caused by excessive borrowing with still more borrowing, this time by the government as borrower and lender of last resort. These criticisms are wrong and right: wrong, if the government remains creditworthy; right, if it does not.
This is the text of a speech given by Martin Wolf, chief economics commentator, at the FT’s annual economists’ drinks party in London last night.
Last year I enjoyed telling a number of entirely unfair jokes about economists. This year, I looked at the same source and found only one joke about the profession’s involvement in depressions. Here it is:
“Such a severe depression and banking crisis could not have been achieved by normal civil servants and politicians, it required economists’ involvement.”
This, in short, is a time for humility. Why did we mostly get “it” so sensationally wrong? How did something that looks increasingly like the precursor of a slump creep up on almost all of us this year? It is a pretty good question. It is a pretty embarrassing one, too. It is one everybody I meet now asks. Even Her Majesty has asked why we didn’t do a better job of forecasting this mess.
By Jeffrey D. Sachs
Governments meet in Doha this weekend to review the global system of development financing, the means by which resources flow globally to support sustainable development. The system is broken, though the conferees are unlikely to say so clearly.
By Chris Giles, Economics editor
It has been a bad year for economic forecasters. So bad that royalty wants to know what went wrong. “Why did no one see it coming?” Britain’s Queen Elizabeth asked during a visit to the London School of Economics this month.
Her Majesty’s question has sparked a series of ludicrous claims about the prescience of individual forecasters.
We have bad news and good news. The bad news is that the world economy is teetering on the brink of what may well be the most damaging slowdown since the second world war. Policymakers around the world – particularly in the inordinately complacent surplus countries – do not begin to understand what this may mean. The good news is that, after an extended period of overvaluation, stock markets are, at last, attractively priced. This should have enticing implications for investors and even for audacious governments.
How does one measure fundamental value? The chart shows two such measures – “Q” and the “cyclically adjusted price earnings ratio” (Cape).
The first of these measures derives from the work of the late James Tobin, a Nobel laureate economist. Q is the ratio of the value of an individual stock (or of the stock market as a whole) to net assets, at replacement cost. Tobin initially proposed this ratio as a way of explaining investment. Andrew Smithers of London-based Smithers & Co, from whom I have obtained the data, realised that Q could be turned round, to value the stock market, instead: high Q then forecasts not so much an investment surge as a stock market fall, and vice versa. If the stock market values the net worth of a company at far more than it costs to re-create its assets, either assets should expand or the market valuation should fall. In practice, argues Mr Smithers, it is more likely that the market is wrong than the investment decisions of companies.
The remainder of the article can be read here. Discussion from our forum members and contributors appears below.
By Kumiharu Shigehara
In his most recent speech, Donald Kohn, vice-chairman of the US Federal Reserve, said that the Fed had learned that the aftermath of a bubble can be far more painful than it had imagined.
By Martin Wolf
Stuff happens. Stuff has certainly happened to both the UK economy and the government’s fiscal position. What Alistair Darling, UK chancellor, delivered on Monday was not a pre-Budget report, but a crisis budget.
Continue reading “Darling takes a gamble on huge deficits”
By John Muellbauer
The world economy is suffering from a Keynesian shortage of demand. Worse, it is trapped in a dangerous downward spiral of falling asset prices, rising bankruptcies, foreclosures and unemployment feeding into more of the same, along with falling commodity and now goods prices. Since no country is exempt, international co-ordination is needed and made easier because of the obvious common interest. The rapidity of the current contraction also means that fiscal solutions, though helpful, are not timely enough and create obvious free rider problems.
That is why monetary policy should be the first line of action. But conventional monetary policy has gone almost as far as it can in the US and Japan. The failure of the European Central Bank and the Bank of England decisively to respond in October was very damaging, but that is now history*. Policy rates will fall further in December, but may make only a modest contribution to stabilising demand, given the further decline in bank balance sheets and rising levels of fear. It is therefore time for unorthodox policy, but one that is far better than Milton Friedman’s helicopter drops of money, because it is reversible.
Continue reading “The world’s central banks must buy assets”
| About this blog | Blog guide |
Older entries