[A-List] Global Economy: print money, quick!

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Central bankers will not repeat mistakes of the 1930s
 
Business desk leader
The Sunday Herald, 22 September 2002
 
ARE we teetering on the brink of a 1930s-style depression, complete with
deflation and mounting unemployment, which we will all have to endure
for a decade or more?

Talk of such a scenario is already doing the rounds of some City-based
fund managers, many of whom have worked themselves into a depression
almost as deep as the euphoria of the bull run was high.

There are indeed disturbing parallels between the Great Depression -- a
frightening time when prices fell, investors stopped investing and
companies and individuals committed to paying off old loans went bust as
lower prices and wages left them unable to repay -- and now.

Andy Brough of Schroder's, one of the City's best-known money men,
predicts the FTSE-100 index is going to languish below the 6000 mark for
a decade. And one of Germany's leading economists believes the world
risks following Japan into a deflationary spiral far more serious and
prolonged than a conventional recession.

'The people running the world's central banks and those responsible for
economic policy should take the signs much more seriously,' says Norbert
Walter, Deutsche Bank's chief economist.

Walter has been circulating a paper in the hope of influencing the
world's decision-makers ahead of the autumn meetings of the
International Monetary Fund and World Bank later this month.

He warns: 'If we don't get this right, we face a second leg of
recession, a double dip, combining with deflation.'

'Look at the facts,' Walter adds. 'Japan has seen deflation over the
past three years. Consumers and entrepreneurs are postponing purchase
decisions. China is also experiencing a decline in the price level. In
the US, consumer price inflation is running at just barely 1%. This
means the price level in the US is practically stable, and the augurs
now speak of a double dip, a second drop in economic activity.'

'Recession cannot be ruled out, considering the multitude and
seriousness of the trouble spots and potential risks to economic growth.
To mention just a few -- the accounting scandals, the crisis in Latin
America and the looming war with Iraq.'

Walter believes we need coordinated international stimulus along
neo-Keyne sian lines to shift the world economy back into gear. However,
several economic historians, including Michael Bordo, believe the Great
Depression was precipitated by US monetary policy and germinated by a
series of banking panics, and then infected the rest of the world
through the international gold standard.

The mechanisms of financial policy are, happily, very different today,
and central banks, with the possible exception of the European Central
Bank, have been less clumsy in their responses to stock markets'
prolonged collapse.

Milton Friedman, the father of monetarism and free-market economics (and
hence Thatcherism and Reaganomics) sees little prospect of a return to
the global deflation of the 1930s.

'I think there is very little chance of that,' Friedman recently told a
Canadian newspaper. 'Central banks have learned that the way to avoid
deflation is to print money. There may be temporary periods of a year or
so. The Japanese experience of six, seven or eight years of deflation
has been extreme.'

The 90-year-old added that Japan's decision to start 'printing money'
would pay dividends. 'The surprise over the next five years may well be
Japan. I think it is on the verge of making a comeback.'