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End of road in sight for fiscal policies

We have been opposed from the start to the policy of trying to stimulate the economy using fiscal means to re-ignite a consumer boom and re-inflate the house price bubble. The notion is intellectually and morally bankrupt. It now seems to be approaching the end of the road. But things may now be rolling unstoppably towards the precipice of sterling collapse. A few commentators are forecasting a meltdown of the £ in 2009, but we are not in a position to say whether this is this scaremongering or are if they being more pereceptive than most of the experts. The fact that the prospect is being mentioned at all is worrying, and the experts have not exactly distinguished themselves in the past two years so prudence would suggest taking note of the possibility. We have said several times that the initial measures that could lead to hyperinflation have now been enacted but in our view it is not yet inevitable. Everything now depends on what the authorities do next.

Bank Governor – borrowing has to stop

The Bank of England Governor, Mervyn King, used an appearance at the Treasury Select Committee to warn the Government of the dangers of borrowing any more to bring the recession to an end.

The Daily Telegraph writes

In comments which will increase the speculation that the Chancellor will not embark on an American-style economic bail-out at the Budget next month, Mr King said Alistair Darling must keep spending under control. “I’m sure the government will want to be cautious in this respect,” he said. “There is no doubt we are facing very large fiscal deficits over the next two to three years. “Given how big those deficits are, I think it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits.

“The level of the fiscal position in the UK is not one that would say: ‘Well, why don’t we just engage in another significant round of fiscal expansion?”

The warning amounts to the Governor’s most forceful language yet on the dangers facing the public finances. It comes only days after the International Monetary Fund warned that Britain is facing the biggest government deficit in the western world, even before it has pledged any extra cash to be spent on the recession.

“Unexpected” inflation rise

The message was reinforced by official data which revealed that the Consumer Prices Index (CPI), the government’s preferred measure which is used in economic policy, rose to 3.2pc in February. This was described as “unexpected”, though to anyone looking at shop prices, this should not have been a surprise. A country which imports so much of its food will naturally experience rising prices if it lets the exchange rate of its currency drop. This has got to be the end of fiscal stimulus.

US rescue plan “Robbery of people” – Stiglitz

Meantime, in the US, the Geithner rescue package has come under attack. The US government plan to free beleaguered banks of up to $1 trillion (£690bn) of toxic assets will expose American taxpayers to too much risk, leading economist Joseph Stiglitz has cautioned.

Stiglitz said Geithner’s plan amounted to ‘robbery of the American people’. The Nobel Prize-winning economist, said that the plan is “very flawed” and “amounts to robbery of the American people.” Professor Stiglitz on Tuesday led a list of well-known economists and high-profile industry figures who have said Treasury Secretary Tim Geithner’s toxic asset plan may not be as successful as it first seems. The plan involves ensuring up to $100bn of government funding is matched by private investors, with the monies combined and leveraged up, in some cases to by as much as 20:1, with the help of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), to buy pools of unwanted assets.

Professor Stiglitz, speaking at a conference in Hong Kong, said that the US government is essentially using the taxpayer to guarantee the downside risks, namely that these assets will fall further in value, while the upside risks, in terms of future profits, are being handed to private investors such as insurance companies, bond investors and private equity funds.

“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.” Daily Telegraph article