March 13, 2013 6:51 pm
Beware monetary experimentation
Suffering from persistently weak economies, governments and central banks are experimenting with ever more aggressive – some say dangerous – monetary treatments. Countries are being enrolled, like it or not, in the economic equivalent of clinical trials.
Before embarking on a new course of treatment, the doctors ought to inspect the patients in the wards next door. I found myself last month visiting two countries following diametrically opposite courses of treatment: Portugal, perhaps the least demonstrative sufferer on the eurozone periphery; and Argentina, which has long injected economic drugs not registered elsewhere. Both are instructive – and discouraging.
Portugal belongs to a strong currency bloc – its money functions as a real store of value, and convertibility is not in question. But the place is stony broke, and these advantages, so dear in the abstract to business people, have little appeal to residents with no money at all. The new roads built with EU funds are deserted, since they carry a toll; traffic has been displaced on to the roads they were designed to relieve. People prefer double-parking their ageing cars in the narrow streets to paying a euro or two at the shiny new car park. The receptionist in the empty hotel arrives, after a long wait, to serve you a drink in the bar; he later turns up as a waiter in the restaurant. Though they have the gentlest manners in Europe, the Portuguese have begun to express their frustration in a frank and vivid style of graffiti. Everything is on sale and no one is buying.
So poor Patient Fado, placed on an austerity-plus regime, is semi-comatose. The state spends as little as it can, and tries to extract ever more from its citizens, who seem to spend most of their time working out how to avoid paying. Fado’s ratios of indebtedness remain stubbornly high but the expensive foreign doctors believe a higher dose of the present medicine will, in the end, prove to be the right answer.
In Argentina, by contrast, the currency is on a managed slide. There is plenty of it, though, and since it is fast losing its internal value – the government says inflation is at roughly 10 per cent a year; everyone else tells you it is more than 25 per cent – people are in a hurry to spend it. It is rather like Britain in the 1970s: you can buy air tickets and holiday packages in your own currency at the official exchange rate but you have no foreign currency to use once you arrive abroad. There are no new money flows coming into the country (though companies reinvest the profits they make there), Argentina has few external assets earning foreign currency, and it has no access to the credit markets, following a default still fuelling lawsuits 10 years later.
So minor fluctuations in the trade account, which the government is obliged to micromanage, are all-determining. Banks are required to lend a substantial proportion of their deposit base at 15 per cent for “productive investment”: no pussy-footing about with persuasion here.
Patient Tango receives repeated stimulation. She is economically hyperactive, rushing to get her constantly increasing wages in the hospital shop (she is rarely allowed to go out). Her doctors say her ratios are wonderfully improved since her debt restructuring. Rather like Britain’s Patient Morris – now in a seedy hospital after a spell in the casualty department – she had been living way beyond her means.
In the eurozone, Fado has been forced to stop and seems barely to be living at all. Tango has tried a different response, deciding those to whom she owes money are vultures, and it would be outrageous to pay them back, which has done wonders for her debt-to-gross domestic product number. They, in turn, do not seem that keen to pay for her treatment.
Morris has been for many years a patient under Dr King, an old-fashioned GP who used to tell him he was in fair health while warning him not to eat and drink so much. Now, after his heart attack, Dr King says he had been urging him to lose weight for years. Dr King is retiring and Dr Carney, new to the practice, is considering electroconvulsive therapy. He believes patients feel better if they are told they will be flat on their back for a long time. From time to time the saturnine registrar, a Mr Osborne, drops in and discusses amputation.
Dear old Morris was put on a version of Fado’s regime, but with a much lower dose. Unlike Fado, he is not in a near-comatose state but he is not getting much stronger either. The temptation to switch to something more like Tango therapy, though without the un-British excess of default, is clearly growing.
In Portugal, the quantity and velocity of money in circulation are both down; in Argentina, both are rising rapidly. Neither presents an attractive example. In Britain the Bank of England has prevented the quantity from falling too far, but seems unable to get the money moving. A little well-targeted fiscal relaxation feels less risky at this stage than more monetary experimentation. Doctors are enjoined, above all, to do no harm.
The writer is a former chief executive of Barclays
.
Before embarking on a new course of treatment, the doctors ought to inspect the patients in the wards next door. I found myself last month visiting two countries following diametrically opposite courses of treatment: Portugal, perhaps the least demonstrative sufferer on the eurozone periphery; and Argentina, which has long injected economic drugs not registered elsewhere. Both are instructive – and discouraging.
Portugal belongs to a strong currency bloc – its money functions as a real store of value, and convertibility is not in question. But the place is stony broke, and these advantages, so dear in the abstract to business people, have little appeal to residents with no money at all. The new roads built with EU funds are deserted, since they carry a toll; traffic has been displaced on to the roads they were designed to relieve. People prefer double-parking their ageing cars in the narrow streets to paying a euro or two at the shiny new car park. The receptionist in the empty hotel arrives, after a long wait, to serve you a drink in the bar; he later turns up as a waiter in the restaurant. Though they have the gentlest manners in Europe, the Portuguese have begun to express their frustration in a frank and vivid style of graffiti. Everything is on sale and no one is buying.
So poor Patient Fado, placed on an austerity-plus regime, is semi-comatose. The state spends as little as it can, and tries to extract ever more from its citizens, who seem to spend most of their time working out how to avoid paying. Fado’s ratios of indebtedness remain stubbornly high but the expensive foreign doctors believe a higher dose of the present medicine will, in the end, prove to be the right answer.
In Argentina, by contrast, the currency is on a managed slide. There is plenty of it, though, and since it is fast losing its internal value – the government says inflation is at roughly 10 per cent a year; everyone else tells you it is more than 25 per cent – people are in a hurry to spend it. It is rather like Britain in the 1970s: you can buy air tickets and holiday packages in your own currency at the official exchange rate but you have no foreign currency to use once you arrive abroad. There are no new money flows coming into the country (though companies reinvest the profits they make there), Argentina has few external assets earning foreign currency, and it has no access to the credit markets, following a default still fuelling lawsuits 10 years later.
So minor fluctuations in the trade account, which the government is obliged to micromanage, are all-determining. Banks are required to lend a substantial proportion of their deposit base at 15 per cent for “productive investment”: no pussy-footing about with persuasion here.
Patient Tango receives repeated stimulation. She is economically hyperactive, rushing to get her constantly increasing wages in the hospital shop (she is rarely allowed to go out). Her doctors say her ratios are wonderfully improved since her debt restructuring. Rather like Britain’s Patient Morris – now in a seedy hospital after a spell in the casualty department – she had been living way beyond her means.
In the eurozone, Fado has been forced to stop and seems barely to be living at all. Tango has tried a different response, deciding those to whom she owes money are vultures, and it would be outrageous to pay them back, which has done wonders for her debt-to-gross domestic product number. They, in turn, do not seem that keen to pay for her treatment.
Morris has been for many years a patient under Dr King, an old-fashioned GP who used to tell him he was in fair health while warning him not to eat and drink so much. Now, after his heart attack, Dr King says he had been urging him to lose weight for years. Dr King is retiring and Dr Carney, new to the practice, is considering electroconvulsive therapy. He believes patients feel better if they are told they will be flat on their back for a long time. From time to time the saturnine registrar, a Mr Osborne, drops in and discusses amputation.
Dear old Morris was put on a version of Fado’s regime, but with a much lower dose. Unlike Fado, he is not in a near-comatose state but he is not getting much stronger either. The temptation to switch to something more like Tango therapy, though without the un-British excess of default, is clearly growing.
In Portugal, the quantity and velocity of money in circulation are both down; in Argentina, both are rising rapidly. Neither presents an attractive example. In Britain the Bank of England has prevented the quantity from falling too far, but seems unable to get the money moving. A little well-targeted fiscal relaxation feels less risky at this stage than more monetary experimentation. Doctors are enjoined, above all, to do no harm.
The writer is a former chief executive of Barclays
.
Copyright The Financial Times Limited 2013.
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