From the December 9, 2007 Sunday Times (London)
December 10, 2007
by Irwin Stelzer
For some reason, people in Britain think their fate – the price of their homes, what they have to pay when using their credit cards, the growth rate of the economy – is determined by the Bank of England's monetary policy committee (MPC). It isn't, at least not entirely. While all eyes last week were focused on the MPC, the fate of the world's economies was being determined in Washington, Abu Dhabi and Beijing.
The MPC's quarter-point cut in interest rates will trim a few pounds off some monthly mortgage payments, and perhaps ease credit markets, but the US Treasury secretary, the Opec oil cartel, and Chinese currency manipulators might in the end have more to say about the welfare of the average Brit than the country's own MPC.
In Washington the news bodes well for Britain's speedy bounce-back from the current slowdown. The jobs market surprised analysts with its strength, and factory orders rose a bit. Rapidly rising labour productivity kept labour costs down, offsetting some of the inflationary effect of the falling dollar and high oil and food prices. That should give the Federal Reserve Board's monetary policy committee room to cut interest rates at its meeting this Tuesday, if it decides the credit markets need easing.
Even more important, Treasury secretary Hank Paulson has finally persuaded the relevant politicians, regulators and lenders that it would be in nobody's interest to turn millions of people out of their homes. So some sort of freeze on interest rates that were scheduled to be "reset" at much higher levels is now being worked out. That is no silver bullet for all that ails the housing market, but it will prevent major additions to the already-high inventory of unsold homes, and ease the pressure on house prices. Which should help to arrest the downward spiral in the value of some of the collateral backing loans on the balance sheets of America's lending institutions. There will be a cost: future lenders are on notice that the government is willing to come between them and the interest payments they are due. This will make mortgage lending riskier, and drive up the rate needed to cover that risk.
But politicians always favour jam today over jam tomorrow, and are unworried about the long-term consequences of freezing rates. That freeze will help banks in Europe which, like their American counterparts, succumbed to the temptation of the returns to be earned by sub-prime lenders. So much for the "decoupling" of American and world economies. As Christian Noyer, a member of the European Central Bank's governing council, told the press, deteriorating consumer and business confidence in Europe "may put a question mark over our hopes that Europe could 'decouple' its cyclical evolution from the evolution of financial markets and uncertainties in the US outlook".
The news from Abu Dhabi, where Opec held its latest meeting, was not quite as encouraging as that coming from America. The cartel of oil-producing countries, which controls about 40% of world output, decided not to increase production from its current level of 27m barrels a day, despite pleas from President George Bush and leaders of consuming countries. Instead, the cartelists will sit on their spare capacity, which has risen from about 1m barrels a day to about 4m barrels. Opec is concerned that a slowdown in America will so reduce demand for oil that the recent modest price drop will accelerate if it increases world supply, and that the dollars it gets for its crude oil just won't go as far as they once did in Harrods or the world's arms bazaars.
The good news coming out of the Abu Dhabi meeting was that the oil producers decided not to stop pegging their currencies to the dollar – only Kuwait, which owes its very existence to America, has taken that step. Had the other petro-countries done so, their demand for dollars would have declined, putting more downward pressure on the American currency. That would have made life even more difficult for European exporters, who are increasingly finding their goods priced out of important overseas markets, and are watching helplessly as imports displace more made-at-home products.
Which brings us to Beijing, which has more bad news for Europe and America: it will not succumb to the entreaties of French President Nicolas Sarkozy, EU trade commissioner Peter Mandelson, US Treasury secretary Paulson, the US Senate or anyone else and allow its currency to appreciate to anything like the level the market might set. It will, therefore, in effect continue to subsidise exports. American manufacturers find it difficult to compete, but can at least take solace from the spurt in exports triggered by the falling dollar. Meanwhile, Europe's businessmen have to cope not only with a $1.50 euro and a $2 pound, but a yuan sinking in parallel with the American currency. That makes Chinese goods cheaper than ever in Europe, putting European businesses in the unenviable position of seeing their products become more expensive in America while Chinese products are getting cheaper in Europe – a double whammy, at a time when financial markets have already made businesses and consumers more than a little nervous.
There we have it: good news from the Bank of England and America for bankers, bad news from Abu Dhabi for consumers, and bad news for Beijing's competitors.
Next week, good news is likely for those who are pressing the Fed's monetary policy committee to maintain the unity of the English-speaking central bankers by once again shaving a bit off short-term rates – the British and Canadians have just cut rates, and the Australians are hinting that they will follow.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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