A draft communiqué for the G20 summit stops short of committing the leaders to a new fiscal boost. The US and UK had earlier called for other nations to engage in more Keynesian-style stimulus to restore economic growth. Continental European nations, led by Germany, had resisted this.
The communiqué, published by the Financial Times, merely reiterates that the G20 countries have already engaged in “unprecedented and coordinated” fiscal stimulation and says they are “committed to deliver the scale of sustained effort necessary to restore growth while ensuring long-run fiscal sustainability.”
The 24-point communiqué also promises to “resist protectionism and reform our markets and our institutions for the future.”
Meanwhile, President Barack Obama admitted to the FT in an interview that it would be difficult for him to ask for more money to recapitalise the banking system until Wall Street convinces voters it is not misusing the money. “If voters perceive that it’s a one-way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe, then it is harder to make an argument for further intervention.”
G20 communiqué
-----
Avoiding Armageddon
By Hugo Dixon
G20: Be thankful for small mercies. The US and the UK aren’t likely to fall out with continental Europe at this week’s G20 summit in London over the fiscal boosts. The draft communiqué promises to do what’s needed to restore growth and ensure long-run fiscal sustainability. But it falls short of calling for any new Keynesian stimulus.
This fudged language is an acceptance of the facts of life. The fiscal stimulation so far, led by the US and China, was probably needed to stop the global economy tumbling into the abyss. But even President Barack Obama doesn’t think he can get Congress to approve another, even more ambitious deficit spending plan, at least not right away.
Gordon Brown, the other neo-Keynesian cheerleader, had a timely reminder last week that states can’t borrow endlessly. The UK prime minister’s aides claimed that the failure of a government bond auction was just a technical glitch. But Brown has learned that investors’ trust in the government’s creditworthiness can no longer be taken for granted.
Obama, Brown and some other leaders might want to try to pump up their economies with another big round of borrow-and-spend. But if the market won’t cooperate, governments would have to have to slam on the brakes, hiking taxes and interest rates in order to stay in business. Such a sudden reversal would create what some people are calling the Armageddon scenario.
One way of avoiding Armageddon is to ensure long-run fiscal sustainability, as the G20 draft puts it. That’s probably the most one can expect from any communiqué. But such platitudes won’t cut much ice with investors. They will want to see credible plans for getting budgets back into balance in the medium term.
Without that, they will fear that governments will go for print-and-spend, a policy that is likely to lead to high inflation. If inflation fears take hold, governments will find it even harder to borrow the mountains of money they need now to finance their deficits.
hugo.dixon@breakingviews.com
http://www.breakingviews.com/2009/03/30/G20.aspx?sg=nytimes#
Showing posts with label G20. Show all posts
Showing posts with label G20. Show all posts
Monday 30 March 2009
Will the G20 meeting help resolve the crisis?
Will the G20 meeting help resolve the crisis?
Saturday, 21 March 2009 23:23
THE G20, REPRESENTING 20 of the world’s most influential economies, is to hold a summit meeting early next month. There have been intensive preparations for this summit and hopes have been raised in financial markets that joint international action will be taken to halt the spread of the crisis and lay the foundations of recovery. Our view is that internationally co-ordinated policies are a vital part of the policies needed to bring this crisis to an end but investors should be realistic about what can be achieved at such international summits.
WHY INTERNATIONALLY CO-ORDINATED POLICIES ARE VITAL
The current global slowdown is the worst we have seen since the post-World War II global economic order was established in 1945. Moreover, the global crisis is unprecedented in the speed of the economic declines many countries are suffering, its geographic spread and the complexity of understanding and resolving its roots because of the new-fangled financial innovations which lie at the heart of the crisis. The scale and global nature of the crisis alone calls for joint action but there are other reasons why coordinated actions are needed to resolve the crisis:
First, substantial amounts of monetary stimulus are needed to kickstart a recovery. Yet, if some countries are far more aggressive in this area than others, then any recovery could be thrown off-track by currency turmoil. For example, if the US is prepared to literally print money to ease its way out of the crisis but the European Central Bank is not, then at some point, holders of US dollar assets are likely to lose confidence in the dollar and switch to the euro. Already, the Chinese — now the world’s largest holders of US dollar securities — have signalled their discomfort with the risks associated with the US dollar. Premier Wen Jiabao noted in an important speech to the National People’s Congress recently that he was quite “worried” about China’s investments in the US dollar.
Related to this is the fact that so far policy makers have not used one monetary tool that could prove to be highly potent — getting the International Monetary Fund (IMF) to issue new Special Drawing Rights(SDRs). The latter are a form of global money which the IMF, acting as a sort of global central bank, is allowed by its statutes to issue. Technically, if 85% of IMF voting shares opt to do so, the IMF can simply “print money” by allocating each IMF member country with new SDRs. For the past 30 years though, the US has opposed such SDR issues. It will require a highlevel agreement among the world’s top economies to allow an SDR issue to materialise, something which could be a strong positive for the world economy.
Second, the global crisis is widening. Several countries in eastern Europe stand on the brink of a crisis that could be as bad for them as the Asian financial crisis was bad for this part of the world. Hungary — one of the countries at risk — has estimated that US$230 billion ($350.5 billion) worth of aid is needed to contain this threat. Such massive rescue packages can only happen if there is joint agreement to share the burden of such aid.
Third, an important reason why trade flows have collapsed so precipitately is the disruption in trade finance. So far, individual or bilateral efforts to get trade finance flowing again have not worked. Here, too, international co-operation is crucial.
Fourth, we need global agreement on avoiding mutually damaging actions, of which two are critical:
There are increasing signs that, despite all the rhetoric about preserving world trade, many countries are resorting to disguised forms of trade distortion to protect their producers. If there is no firm resolve to prevent this spreading, we could still see the breakdown of free trade which most people agree is important to maintain global economic growth.
There is also a temptation for some countries to engage in competitive devaluations. Again, joint agreement is needed if to avoid this.
DON'T HOLD YOUR BREATH
So, can the G20 economic co-operation process deliver the results we want? Here is where we cannot be fully confident. There are several reasons why we need to be cautious.
First, the structure of the G20 is not amenable to quick decision-making. While it is supposed to be restricted to just 20 countries sitting around the table, in reality, the number of actual participants has soared in recent weeks. For example, while Indonesia is the Asean member in the G20, Thailand as the chairman of the Asean summit this year will reportedly be there to represent Asean. Similarly, other countries are being added, as are several international agencies. We understand there might now be 48 people sitting around the table, not just 20. That size does not make for easy or quick decision-making.
Second, there are fundamental disagreements which can at best be papered over, not fully resolved. We saw this with the recently concluded G20 finance ministers’ meeting. While the US was keen to secure agreement among all nations there for aggressive fiscal pump priming, there was not sufficient consensus on this, forcing the Americans to drop their demand that all countries commit themselves to fiscal stimulus equivalent to at least 2% of GDP.
Nevertheless, the G20 process is still useful. Bringing together key world leaders in this format will help ensure that some governments do not follow through with mutually damaging policies. So long as all these countries see themselves as having a stake in the G20 process they are bound to avoid the trade-destroying policies that led to the Great Depression of the 1930s. Not only will the G20 process help avoid bad policies, the sharing of experiences at such meetings can also help individual countries craft solutions to their national problems by learning from others.
Moreover, only such gatherings of a large number of countries can secure agreement on the way forward on some key areas — such as the expanded resources to be given to the IMF and other multilateral agencies such as the Asian Development Bank, an agreement that was the product of the G20 finance ministers’ meeting.
So, what is the bottom line? The good news is that multilateralism is alive — so we can almost certainly avoid the foolish mistakes of the past such as blatant protectionism. The bad news is that the decision-making process will not be speedy and that means that the bottom to the crisis is still some way off.
Manu Bhaskaran is a partner and member of the board of Centennial Group Inc, an economics consultancy
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Will the G20 meeting help resolve the crisis?
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Saturday, 21 March 2009 23:23
THE G20, REPRESENTING 20 of the world’s most influential economies, is to hold a summit meeting early next month. There have been intensive preparations for this summit and hopes have been raised in financial markets that joint international action will be taken to halt the spread of the crisis and lay the foundations of recovery. Our view is that internationally co-ordinated policies are a vital part of the policies needed to bring this crisis to an end but investors should be realistic about what can be achieved at such international summits.
WHY INTERNATIONALLY CO-ORDINATED POLICIES ARE VITAL
The current global slowdown is the worst we have seen since the post-World War II global economic order was established in 1945. Moreover, the global crisis is unprecedented in the speed of the economic declines many countries are suffering, its geographic spread and the complexity of understanding and resolving its roots because of the new-fangled financial innovations which lie at the heart of the crisis. The scale and global nature of the crisis alone calls for joint action but there are other reasons why coordinated actions are needed to resolve the crisis:
First, substantial amounts of monetary stimulus are needed to kickstart a recovery. Yet, if some countries are far more aggressive in this area than others, then any recovery could be thrown off-track by currency turmoil. For example, if the US is prepared to literally print money to ease its way out of the crisis but the European Central Bank is not, then at some point, holders of US dollar assets are likely to lose confidence in the dollar and switch to the euro. Already, the Chinese — now the world’s largest holders of US dollar securities — have signalled their discomfort with the risks associated with the US dollar. Premier Wen Jiabao noted in an important speech to the National People’s Congress recently that he was quite “worried” about China’s investments in the US dollar.
Related to this is the fact that so far policy makers have not used one monetary tool that could prove to be highly potent — getting the International Monetary Fund (IMF) to issue new Special Drawing Rights(SDRs). The latter are a form of global money which the IMF, acting as a sort of global central bank, is allowed by its statutes to issue. Technically, if 85% of IMF voting shares opt to do so, the IMF can simply “print money” by allocating each IMF member country with new SDRs. For the past 30 years though, the US has opposed such SDR issues. It will require a highlevel agreement among the world’s top economies to allow an SDR issue to materialise, something which could be a strong positive for the world economy.
Second, the global crisis is widening. Several countries in eastern Europe stand on the brink of a crisis that could be as bad for them as the Asian financial crisis was bad for this part of the world. Hungary — one of the countries at risk — has estimated that US$230 billion ($350.5 billion) worth of aid is needed to contain this threat. Such massive rescue packages can only happen if there is joint agreement to share the burden of such aid.
Third, an important reason why trade flows have collapsed so precipitately is the disruption in trade finance. So far, individual or bilateral efforts to get trade finance flowing again have not worked. Here, too, international co-operation is crucial.
Fourth, we need global agreement on avoiding mutually damaging actions, of which two are critical:
There are increasing signs that, despite all the rhetoric about preserving world trade, many countries are resorting to disguised forms of trade distortion to protect their producers. If there is no firm resolve to prevent this spreading, we could still see the breakdown of free trade which most people agree is important to maintain global economic growth.
There is also a temptation for some countries to engage in competitive devaluations. Again, joint agreement is needed if to avoid this.
DON'T HOLD YOUR BREATH
So, can the G20 economic co-operation process deliver the results we want? Here is where we cannot be fully confident. There are several reasons why we need to be cautious.
First, the structure of the G20 is not amenable to quick decision-making. While it is supposed to be restricted to just 20 countries sitting around the table, in reality, the number of actual participants has soared in recent weeks. For example, while Indonesia is the Asean member in the G20, Thailand as the chairman of the Asean summit this year will reportedly be there to represent Asean. Similarly, other countries are being added, as are several international agencies. We understand there might now be 48 people sitting around the table, not just 20. That size does not make for easy or quick decision-making.
Second, there are fundamental disagreements which can at best be papered over, not fully resolved. We saw this with the recently concluded G20 finance ministers’ meeting. While the US was keen to secure agreement among all nations there for aggressive fiscal pump priming, there was not sufficient consensus on this, forcing the Americans to drop their demand that all countries commit themselves to fiscal stimulus equivalent to at least 2% of GDP.
Nevertheless, the G20 process is still useful. Bringing together key world leaders in this format will help ensure that some governments do not follow through with mutually damaging policies. So long as all these countries see themselves as having a stake in the G20 process they are bound to avoid the trade-destroying policies that led to the Great Depression of the 1930s. Not only will the G20 process help avoid bad policies, the sharing of experiences at such meetings can also help individual countries craft solutions to their national problems by learning from others.
Moreover, only such gatherings of a large number of countries can secure agreement on the way forward on some key areas — such as the expanded resources to be given to the IMF and other multilateral agencies such as the Asian Development Bank, an agreement that was the product of the G20 finance ministers’ meeting.
So, what is the bottom line? The good news is that multilateralism is alive — so we can almost certainly avoid the foolish mistakes of the past such as blatant protectionism. The bad news is that the decision-making process will not be speedy and that means that the bottom to the crisis is still some way off.
Manu Bhaskaran is a partner and member of the board of Centennial Group Inc, an economics consultancy
Back to TopQuote this article on your site
To create link towards this article on your website,
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Preview :
Will the G20 meeting help resolve the crisis?
Saturday, 21 March 2009 © 2009 - The Edge Singapore
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Last Updated on Sunday, 22 March 2009 13:56
http://www.theedgesingapore.com/blogsheads/1000-manu-bhaskaran-2009/3137-will-the-g2o-meeting-help-resolve-the-crisis.html
Sunday 29 March 2009
G20 summit: blow for Gordon Brown as £1.4 trillion spending blueprint is leaked
G20 summit: blow for Gordon Brown as £1.4 trillion spending blueprint is leaked
Gordon Brown's preparations for this week's G20 summit in London got off to a bad start last night when a British blueprint for a £1.4 trillion worldwide spending boost was leaked.
By Patrick Hennessy, Political Editor
Last Updated: 11:20PM GMT 28 Mar 2009
In an embarrassing disclosure, a draft of the final communiqué to be signed off by world leaders at the end of the one-day gathering on Thursday appeared in the German magazine Der Spiegel.
There were suspicions that the leak was a deliberate act of sabotage by sources within the German government, where Chancellor Angela Merkel is adopting a more cautious approach to fiscal moves to boost the national economy than Mr Brown, who will chair the summit.
A Downing Street spokesman said the leak was an "old document with out of date figures" and that the £1.4 trillion was an estimate by the International Monetary Fund (IMF) of stimulus measures already introduced by G20 countries. No new money was included, the spokesman added.
The comments, though, only served to increase speculation that Mr Brown was being forced to scale down ambitious plans because of international opposition, led by Germany and France.
Ahead of the summit, which will be held at the ExCel centre in London's Docklands, Mr Brown unveiled plans for a new crackdown on tax havens across the world.
Lord Owen, the former Labour foreign secretary, also warned that unless inflation was controlled, Britain's economy might have to be constrained by the IMF.
David Cameron's Conservative Party also widened its lead over Labour to 13 per cent in an ICM opinion poll for The Sunday Telegraph.
The leaked communiqué mentioned a figure of $2 trillion – £1.4 billion – in brackets, signifying it was a proposal for spending by G20 nations by Britain, as summit host, that still had to be formally agreed. According to the leak, this would boost growth by two per cent and employment by 19 million.
The draft also suggested that Britain wanted the G20 to come up with a target for global growth in 2010 – although no figure was mentioned.
The document stated: "We are determined to restore growth, resist protectionism and to reform our markets and institutions for the future.
"We believe that an open world economy, based on the principles of the market, effective regulation and strong global institutions, can ensure sustainable globalisation with rising wellbeing for all."
Insiders at Der Spiegel said the magazine had obtained the leak from German government sources.
British officials, however, declined to blame Mrs Merkel's inner circle directly, pointing the finger of blame instead at smaller political parties inside her ruling coalition.
A No 10 spokesman said the £1.4 trillion figure did not amount to "extra money" which Britain was calling for governments to spend to try to rescue economies which have been crippled by the credit crunch, but referred instead to estimates of expenditure which had already been made.
Mr Brown has faced claims that he wants to use the Budget, on 22 April, to unveil a big new fiscal stimulus for Britain while Alistair Darling, the Chancellor, and Mervyn King, the Bank of England Governor, are advocating caution.
The Prime Minister wants a main focus of the summit to be a clampdown on tax havens, with a three-point plan aimed at building on moves which have already seen Switzerland and Liechtenstein agree to abide by new transparency standards.
Britain will push for support on new moves to use tax incentives to stop companies and individuals trading with those who are resident in "non-compliant jurisdictions", Government sources said, while there will also be new measures requiring companies to disclose more details of dealings with tax havens.
The third part of the proposed clampdown involves a review of investment policies of institutions such as the IMF and retail development banks with a view to cutting the funds available to tax havens.
Amid the frantic preparations for the summit Lord Owen, foreign secretary under Jim Callaghan in the late 1970s, uses an article in today's Sunday Telegraph to warn that Britain's economy might have to be subject to "IMF disciplines" – which would require painful public spending cuts – to halt a "precipitate loss of confidence".
Lord Owen sounded the alert about the twin threats of a falling pound and inflation, which crippled Callaghan's government, being repeated under Mr Brown. "There is an air of breathtaking unreality in Westminster and Whitehall that reminds me of 1975," he wrote. "Hard choices need to be taken now, not postponed until after an election in 2010."
His comments are certain to infuriate ministers, Labour MPs and activists, many of whom still blame him for his role in splitting Labour by forming the Social Democratic Party (SDP) in the early 1980s.
In autumn 2007, two months after Mr Brown became Prime Minister, the two men held talks in Downing Street, leading to speculation that the peer was considering returning to the Labour fold.
Lord Owen's warning about the IMF echoed similar alerts sounded recently both by George Soros, the Hungarian financier, and Mr Cameron.
Meanwhile, George Osborne, the shadow chancellor, used a speech yesterday to Welsh Conservatives in Cardiff to taunt Mr Brown over his stewardship of the British economy.
Mr Osborne said: "When Gordon Brown sits down with the other G20 leaders in London next week, he will have to explain why he, of all the people sitting around the table, has the highest budget deficit – why the economy he presides over, of all the economies represented at the table, is forecast to still be in recession next year."
http://www.telegraph.co.uk/finance/financetopics/g20-summit/5067296/G20-summit-blow-for-Gordon-Brown-as-1.4-trillion-spending-blueprint-is-leaked.html
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Gordon Brown's preparations for this week's G20 summit in London got off to a bad start last night when a British blueprint for a £1.4 trillion worldwide spending boost was leaked.
By Patrick Hennessy, Political Editor
Last Updated: 11:20PM GMT 28 Mar 2009
In an embarrassing disclosure, a draft of the final communiqué to be signed off by world leaders at the end of the one-day gathering on Thursday appeared in the German magazine Der Spiegel.
There were suspicions that the leak was a deliberate act of sabotage by sources within the German government, where Chancellor Angela Merkel is adopting a more cautious approach to fiscal moves to boost the national economy than Mr Brown, who will chair the summit.
A Downing Street spokesman said the leak was an "old document with out of date figures" and that the £1.4 trillion was an estimate by the International Monetary Fund (IMF) of stimulus measures already introduced by G20 countries. No new money was included, the spokesman added.
The comments, though, only served to increase speculation that Mr Brown was being forced to scale down ambitious plans because of international opposition, led by Germany and France.
Ahead of the summit, which will be held at the ExCel centre in London's Docklands, Mr Brown unveiled plans for a new crackdown on tax havens across the world.
Lord Owen, the former Labour foreign secretary, also warned that unless inflation was controlled, Britain's economy might have to be constrained by the IMF.
David Cameron's Conservative Party also widened its lead over Labour to 13 per cent in an ICM opinion poll for The Sunday Telegraph.
The leaked communiqué mentioned a figure of $2 trillion – £1.4 billion – in brackets, signifying it was a proposal for spending by G20 nations by Britain, as summit host, that still had to be formally agreed. According to the leak, this would boost growth by two per cent and employment by 19 million.
The draft also suggested that Britain wanted the G20 to come up with a target for global growth in 2010 – although no figure was mentioned.
The document stated: "We are determined to restore growth, resist protectionism and to reform our markets and institutions for the future.
"We believe that an open world economy, based on the principles of the market, effective regulation and strong global institutions, can ensure sustainable globalisation with rising wellbeing for all."
Insiders at Der Spiegel said the magazine had obtained the leak from German government sources.
British officials, however, declined to blame Mrs Merkel's inner circle directly, pointing the finger of blame instead at smaller political parties inside her ruling coalition.
A No 10 spokesman said the £1.4 trillion figure did not amount to "extra money" which Britain was calling for governments to spend to try to rescue economies which have been crippled by the credit crunch, but referred instead to estimates of expenditure which had already been made.
Mr Brown has faced claims that he wants to use the Budget, on 22 April, to unveil a big new fiscal stimulus for Britain while Alistair Darling, the Chancellor, and Mervyn King, the Bank of England Governor, are advocating caution.
The Prime Minister wants a main focus of the summit to be a clampdown on tax havens, with a three-point plan aimed at building on moves which have already seen Switzerland and Liechtenstein agree to abide by new transparency standards.
Britain will push for support on new moves to use tax incentives to stop companies and individuals trading with those who are resident in "non-compliant jurisdictions", Government sources said, while there will also be new measures requiring companies to disclose more details of dealings with tax havens.
The third part of the proposed clampdown involves a review of investment policies of institutions such as the IMF and retail development banks with a view to cutting the funds available to tax havens.
Amid the frantic preparations for the summit Lord Owen, foreign secretary under Jim Callaghan in the late 1970s, uses an article in today's Sunday Telegraph to warn that Britain's economy might have to be subject to "IMF disciplines" – which would require painful public spending cuts – to halt a "precipitate loss of confidence".
Lord Owen sounded the alert about the twin threats of a falling pound and inflation, which crippled Callaghan's government, being repeated under Mr Brown. "There is an air of breathtaking unreality in Westminster and Whitehall that reminds me of 1975," he wrote. "Hard choices need to be taken now, not postponed until after an election in 2010."
His comments are certain to infuriate ministers, Labour MPs and activists, many of whom still blame him for his role in splitting Labour by forming the Social Democratic Party (SDP) in the early 1980s.
In autumn 2007, two months after Mr Brown became Prime Minister, the two men held talks in Downing Street, leading to speculation that the peer was considering returning to the Labour fold.
Lord Owen's warning about the IMF echoed similar alerts sounded recently both by George Soros, the Hungarian financier, and Mr Cameron.
Meanwhile, George Osborne, the shadow chancellor, used a speech yesterday to Welsh Conservatives in Cardiff to taunt Mr Brown over his stewardship of the British economy.
Mr Osborne said: "When Gordon Brown sits down with the other G20 leaders in London next week, he will have to explain why he, of all the people sitting around the table, has the highest budget deficit – why the economy he presides over, of all the economies represented at the table, is forecast to still be in recession next year."
http://www.telegraph.co.uk/finance/financetopics/g20-summit/5067296/G20-summit-blow-for-Gordon-Brown-as-1.4-trillion-spending-blueprint-is-leaked.html
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Monday 16 March 2009
Britain showing signs of heading towards 1930s-style depression, says Bank
Britain showing signs of heading towards 1930s-style depression, says Bank
Britain is showing signs of sliding towards a 1930s-style depression, the Bank of England says today for the first time.
By Edmund Conway, Economics Editor
Last Updated: 8:23AM GMT 16 Mar 2009
The country is displaying early symptoms of being trapped in a so-called “debt deflation trap” where families find themselves pushed further and further into the red every month, according to a Bank report published today.
The stark warning will cause serious concerns, since it was this combination of falling prices and soaring debt burdens that plagued the US in the 1930s.
The Bank is using its Quarterly Bulletin to highlight the threat posed to the economy by deflation – where prices fall each year rather than rise.
Although inflation is currently in positive territory, it is expected to become negative in the coming months.
The Bank is worried that this may combine with high levels of indebtedness to squeeze families further.
It says that families with high debts could fall prey to the debt deflation trap. This means that the cost of their debts, which are fixed, would rise compared to average prices throughout the economy. While inflation erodes debts, deflation makes them relatively higher.
The Bank’s paper suggests that Britain is particularly at risk because there is a high proportion of families with significant levels of debt, and many of them are on fixed mortgage rate, which means they will not benefit from rate cuts.
Britons’ total personal debt – the amount owed on mortgages, loans and credit cards – is, at £1.46 trillion, more than the value of what the country produces in a year.
Total personal debt has risen by 165 per cent since 1997 and each household now owes an average of about £60,000.
The Conservatives claim this is the highest personal debt level in the world.
The Bank’s paper also says that consumers were suffering as banks keep the cost of borrowing high, despite Government attempts to get them lending again.
Alistair Darling, the Chancellor, and fellow finance ministers used their pre-G20 meeting this weekend to warn that more drastic action was necessary to help bring the world economy back from the brink of a possible repeat of the 1930s.
The Bank’s report puts pressure on Gordon Brown, who this weekend faced further calls to apologise for the recession, to secure agreement on an effective international rescue strategy when he hosts the G20 leaders at a summit in London at the start of April.
It comes as figures this week are expected to show the number of people unemployed will reach the two million mark.
The Bank’s report says: “This configuration of falling asset prices and depressed economic conditions in the face of an adverse demand shock is consistent with recent and prospective macroeconomic developments in the United Kingdom and internationally”.
It helps explain why it took such dramatic action earlier this month to pump extra cash into the economy.
The bank slashed interest rates to just above zero and pledged to create £150 billion worth of cash with which to buy up government and corporate debt.
This so-called quantitative easing is regarded as a radical measure to help prevent a repeat of the conditions associated with the Great Depression.
Many experts believe that the US authorities’ initial reluctance in the 1930s even to cut interest rates was partly responsible for causing the worst economic slump in Western history.
The Chancellor acknowledged at the G20 meeting that the economic situation was “grave” but pledged not to allow a repeat of the Depression years. The ministers promised to pump more cash into their economies if necessary in the next few months.
However, some have expressed concern that the meeting failed in its aspiration to reach a specific agreement on the amount of cash countries need to spend in the coming year. Others have warned that it does not set a clear enough agenda for the much-anticipated full G20 summit on April 2.
Some speculate that the Prime Minister may use the G20 as a justification for a series of further tax cuts and spending increases in the Budget next month, though many economists have warned that despite the scale of the recession faced by the UK the Treasury has little capacity to borrow more.
Mr Darling has signalled that the meeting must not be allowed to mirror a 1933 summit in London which failed to halt the Great Depression. He said failure to agree co-ordinated action then meant that the Depression continued for years when it “need not have done so”.
Writing in The Sunday Telegraph George Osborne, the Shadow Chancellor, said Mr Brown must use the G20 as “the moment to send the clearest of signals that, unlike in the 1930s, this banking crisis will not send the world spinning into a protectionist spiral.”
He said that “ministerial promises” had failed to deliver any real benefits to struggling home owners or desperate businesses.
http://www.telegraph.co.uk/finance/financetopics/recession/4996994/Britain-showing-signs-of-heading-towards-1930s-style-depression-says-Bank.html
Britain is showing signs of sliding towards a 1930s-style depression, the Bank of England says today for the first time.
By Edmund Conway, Economics Editor
Last Updated: 8:23AM GMT 16 Mar 2009
The country is displaying early symptoms of being trapped in a so-called “debt deflation trap” where families find themselves pushed further and further into the red every month, according to a Bank report published today.
The stark warning will cause serious concerns, since it was this combination of falling prices and soaring debt burdens that plagued the US in the 1930s.
The Bank is using its Quarterly Bulletin to highlight the threat posed to the economy by deflation – where prices fall each year rather than rise.
Although inflation is currently in positive territory, it is expected to become negative in the coming months.
The Bank is worried that this may combine with high levels of indebtedness to squeeze families further.
It says that families with high debts could fall prey to the debt deflation trap. This means that the cost of their debts, which are fixed, would rise compared to average prices throughout the economy. While inflation erodes debts, deflation makes them relatively higher.
The Bank’s paper suggests that Britain is particularly at risk because there is a high proportion of families with significant levels of debt, and many of them are on fixed mortgage rate, which means they will not benefit from rate cuts.
Britons’ total personal debt – the amount owed on mortgages, loans and credit cards – is, at £1.46 trillion, more than the value of what the country produces in a year.
Total personal debt has risen by 165 per cent since 1997 and each household now owes an average of about £60,000.
The Conservatives claim this is the highest personal debt level in the world.
The Bank’s paper also says that consumers were suffering as banks keep the cost of borrowing high, despite Government attempts to get them lending again.
Alistair Darling, the Chancellor, and fellow finance ministers used their pre-G20 meeting this weekend to warn that more drastic action was necessary to help bring the world economy back from the brink of a possible repeat of the 1930s.
The Bank’s report puts pressure on Gordon Brown, who this weekend faced further calls to apologise for the recession, to secure agreement on an effective international rescue strategy when he hosts the G20 leaders at a summit in London at the start of April.
It comes as figures this week are expected to show the number of people unemployed will reach the two million mark.
The Bank’s report says: “This configuration of falling asset prices and depressed economic conditions in the face of an adverse demand shock is consistent with recent and prospective macroeconomic developments in the United Kingdom and internationally”.
It helps explain why it took such dramatic action earlier this month to pump extra cash into the economy.
The bank slashed interest rates to just above zero and pledged to create £150 billion worth of cash with which to buy up government and corporate debt.
This so-called quantitative easing is regarded as a radical measure to help prevent a repeat of the conditions associated with the Great Depression.
Many experts believe that the US authorities’ initial reluctance in the 1930s even to cut interest rates was partly responsible for causing the worst economic slump in Western history.
The Chancellor acknowledged at the G20 meeting that the economic situation was “grave” but pledged not to allow a repeat of the Depression years. The ministers promised to pump more cash into their economies if necessary in the next few months.
However, some have expressed concern that the meeting failed in its aspiration to reach a specific agreement on the amount of cash countries need to spend in the coming year. Others have warned that it does not set a clear enough agenda for the much-anticipated full G20 summit on April 2.
Some speculate that the Prime Minister may use the G20 as a justification for a series of further tax cuts and spending increases in the Budget next month, though many economists have warned that despite the scale of the recession faced by the UK the Treasury has little capacity to borrow more.
Mr Darling has signalled that the meeting must not be allowed to mirror a 1933 summit in London which failed to halt the Great Depression. He said failure to agree co-ordinated action then meant that the Depression continued for years when it “need not have done so”.
Writing in The Sunday Telegraph George Osborne, the Shadow Chancellor, said Mr Brown must use the G20 as “the moment to send the clearest of signals that, unlike in the 1930s, this banking crisis will not send the world spinning into a protectionist spiral.”
He said that “ministerial promises” had failed to deliver any real benefits to struggling home owners or desperate businesses.
http://www.telegraph.co.uk/finance/financetopics/recession/4996994/Britain-showing-signs-of-heading-towards-1930s-style-depression-says-Bank.html
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