Interest rates, the flow of funds and perhaps - by default - Armageddon

We have gutted our industries, accumulated massive debts, become the most obsessive gamblers in human history and the goals we alleged were our purpose have never been reached. Indeed, all we have done is to score the most startling series of "own -goals" in economic and financial history. Those goals scored against ourselves are already having social, political and strategic consequences going far beyond those revealed in the fluctuations of the Dow or the collapse of individual banks. They go to the survival of the sort of global community we have claimed to be trying to create since the end of World War II.

Let us have a closer look at some of the more "technical" issues and, in particular, at interest rates and the flow of funds.

The empirical evidence on the impact of interest-rate hikes seems overwhelming. More than 60 years ago, Keynes seemed to view such hikes much as I do. He was ignored so it is not surprising that my views on the subject have been ignored for some 40 years.

That does not mean I am right. What it does mean, however, is that we should look at the record carefully and determine whether we have led ourselves up the garden path in our policies to "fight inflation". I say this, too, in the light of our casual dealing with the whole concept of inflation. There is a chronic failure to draw a sufficient distinction between consumer-price and asset-price inflation.

A hike in interest rates will almost certainly have an impact on asset-price inflation probably, to all intents and purposes, the same as the "damp-down" effect an interest-rate hike will have on fixed-capital investment.

However, once again, we must be careful.

If central bankers, in their wisdom, hike rates slowly and marginally, the acquisition of assets - by speculators, for example - may be encouraged rather than otherwise, at least for a time. The tipping point, when it comes, may be difficult to identify.

I do not want to be dogmatic on the point, but Greenspan’s interest-rate shenanigans may have had this effect on speculators and others especially during the latter years of his reign.

We must also distinguish carefully between interest rates and credit. In certain situations, the crucial consideration may - critically - be credit availability rather than the level of interest rates.

In recent years in particular, the free flow of virtually all kinds of capital globally has meant great volatility in flows and substantial increases in the carry trade. A revival of the carry trade seems under way right now with the US dollar participating significantly in the outward flow of funds.

Whether the latter is so or not, the unregulated flow of funds is a high-risk situation that we dare not ignore if we are to achieve stability and real growth in a more stable future global financial system.

So we must look at the flow of funds and the general availability of credit rather than focus our attention entirely - as we have tended in the past to do - on moving interest rates up or down. In the past, our central bankers have tended to engage in a simplistic yo-yo exercise. This will not give us the dynamic stability we want in the future.