Financial storm clouds gather

What has been the result?

The United States economy has been proclaimed by some to be in "recovery" or on the road to recovery; but growth has been minimal if at all; unemployment is high - and, in actual fact, much higher than official figures pretend; the budget deficit is a trillion or so dollars a year; the external payments deficit is about $50 billion a month and there is hardly any convincing evidence that any genuine "recovery" is an early or even mid-term prospect.

In short, trillions of dollars have been spent by the Fed and the Treasury, the base interest rate is virtually zero and only a phoney "recovery" is the result.

Despite all this, our experience suggests that those in charge of global and national macroeconomic policy are apt to follow wrong or substantially misguided policies to the point at which the agony of their mismanagement compels change and a genuine quest for new and effective economic and financial approaches.

This stubbornness has been demonstrated recently by the Japanese Government and central bank returning to the most extravagant monetary stimuli yet.

This has brought the United States, Japan and the European Community into a partnership of kinds: a partnership of flinging trillions of paper currency at their economic, financial and monetary failures in the hope that it will bring more benefits than the Emperor of the Central African Empire brought his people by flinging money in the air several decades ago.

They are doing this without any clear notion that the money will be spent on solid fixed-capital investment, that it will contribute to increased productivity and that it will, of course, deliver increased production for the market.

This is despite the low interest rates. This is despite the fact that a rise in interest rates is assumed to fight inflation and a cut in interest rates is supposed to enliven inflation. According to the embedded theory, an interest rate of zero should give us inflation of formidable proportions. However, the Japanese have set what would ordinarily have seemed the modest goal of 2% inflation for their zero interest-rate and helicopter drops; and they are doubtful that even this goal can be realised.

Could it be that the basic monetary theory is wrong: a hike in interest rates does not fight consumer-price inflation; instead it inflames it? A zero interest rate would then kill consumer-price inflation stone dead. It would give us deflation, no growth, much joblessness and gathering despair.

The experience since the Lehman collapse suggests this is the picture now and that its character is likely to become even more embedded in our troublesome situation.

The next few weeks are likely to provide evidence whether that is right or wrong. There are likely to be dramatic developments in relative values of currencies including the American dollar whose reserve currency status is at risk and the price of gold. There will be drama elsewhere, in the European Community, in the Euro zone and in the entire structure of the global monetary system. Nationalisation of the banks could swell into a cry on the lips of many. A fair deal for the ordinary individual saver, investor and depositor might become an imperative for a large majority in many countries. Cyprus has opened up issues for virtually everyone everywhere that will not easily be set aside.

Banks and the "financial industry" have little respectability left. They have shown themselves to be gamblers - and not even good gamblers or "speculators." Their incompetence, market immorality and even criminality call for at least a re-enactment of the Glass Stiegel Act; but reform needs to go much further than that. If we are to rescue ourselves nationally and globally from financial catastrophe and its resultant social, political and strategic chaos, we must undertake a transparent review of the entire global financial system and establish institutions and regulations to give us effective reform.

Against this background, that mystifying interest-rate experience, its impact on inflation and deflation and its encouragement of real investment must surely be examined more closely than at any other time in the last forty to fifty years.

Whoever gets it right deserves his or her reward - perhaps to be paid by the zombie bankers and "financiers" who got us into much of the financial mess we have suffered and who are still making fortunes out of speculation of the kind characterised by derivatives.

No one has yet nominated anyone for any such reward, but I expect that, if there's money in it - I repeat, if there's money in it - news of such a nomination or nominations won't be long in coming down the road. That is a can that could for once be profitably left un-kicked.