Since the end of 2008, commercial banks have borrowed from US and British Central Banks at near zero rates. These commercial banks used the funds to purchase higher yielding government debt and profit from the spread. The availability of easy profits discouraged commercial banks from making riskier loans to the enterprise sector. Growth in the economy was therefore provided through massive government spending in excess of tax income, funded through borrowing.
At the end of 2009 revelation of sovereign borrowing levels in breach of euro rules, indicated that the contravening sovereigns, may choose or face expulsion, from the single currency. This provided an additional currency risk for commercial lenders, who demanded excessive yields to compensate. These high yields were financially prohibitive for violating governments, who installed austerity measures. With austerity measures in place, the driver for growth has become absent. So are the US and UK heading for a new great depression or, at the very leased, a Japanese style lost generation?
The most startling differences between Japan and the two main Anglo-Saxon economies are: the propensity to save and population growth. As Anglo-Saxons are renown spenders on credit, so Asian are renown savers, the desire for the US and UK consumers to spend their way out of a recession is therefore far higher then Japanese. While birth rates in most developed countries are falling, Japanese population growth is now in negative territory, which is not assisted by xenophobic policies on immigration. Present UK and US population growth rates at least maintain increasing levels of enterprise and labour resources. For these reasons the US and UK will avoid a similar fate to Japan.
A modern day comparison with policies used during the Great Depression, is the acceleration in Government deficit spending in Japan that couldn’t prevent the last decade of it’s low economic growth, just as it could not prevent mass unemployment rates in FDR’s 1930’s USA. This nullifies the argument of left leaning academics and policy makers, for reliance on ever increasing Keynesian type stimulus.
The most identifiable difference between Bernanke’s 2010 USA and the USA of the 1930’s, is that Federal Reserve Bank of St. Louis recorded Basic Discount Rate did not reached a low of 1% till 1942 and it didn’t get back to 2% until 1953. The second identifiable difference is that, the standard of living in the US and UK is far higher than in the 1930’s, so whilst any slowdown in growth would be discomforting the abject poverty of the 1930’s would be incomparable.
Bernanke has redeemed his initial reputation as a Fed Board member with: first initiating stress testing to identify the capital adequacy of commercial banks; and second of quickly identifying, that the austerity measures caused by the reluctance of the market to fund ballooning budget deficits required, sub ¼ % recorded Effective Federal Funds Rate for longer than the market was anticipating. This indicates the Bank of England Governor King should focus on the monetary response to austerity measures and not his lost battle with inflation of the previous five years to avoid those Depression Blues.
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