Bank of England (BoE) Governor Mervyn King has called for a fresh look at re-balancing between ‘surplus’ and ‘deficit’ economies around the world and more so with Europe.
In a speech delivered at an event hosted by the Institute of Directors in Liverpool yesterday, King said, “...the indebtedness of governments around the world is certainly greater. Time is running out.”
He said after four years into the (global economic) crisis it was time to accept that the underlying problem was one of solvency and not liquidity – solvency of banks and solvency of countries.
“After the crisis began, it took a year before governments in Europe and the United States were persuaded that the problems of their banking sectors resulted not from a shortage of liquidity — that was merely the symptom — but from massively over-leveraged balance sheets. Eventually, in October 2008, banks were recapitalised, albeit, especially on the continent, inadequately so. But the underlying problems of excessive debt have not gone away. As a result, markets are now posing new questions about the solvency of banks, and indeed of governments themselves,” he said.
One way or another, domestic spending must be raised in the surplus countries and lowered in the deficit countries, relative to current trends, he said.
“But easy monetary policy, by bringing forward spending from the future to the present, means that the ultimate adjustment of borrowing and spending will be even greater. That is our dilemma, and that of other deficit countries. The best way to escape this dilemma would be higher spending by the surplus countries — to make possible re-balancing by the deficit countries and supply-side reforms in the deficit countries — to raise expected future incomes and ease the burden of debt repayments.” King said 2011 has been the year of the reluctant recovery. “Growth has disappointed, both here and abroad.”
Last week BoE in its second round of Quantitative Easing decided to pump in £75 billion into the British banking system, taking the total of such stimulus to £275 billion since November 2009.
A majority of the latest injection of liquidity into the banking system has gone into gilts rather than corporate securities. Defending this move, King said that the central bank should not be making decisions on which companies and sectors it must invest in. He said, “By buying gilts, we leave the private sector to decide in which directions the money we create should percolate through the economy.”
Latest government figures show that the number of unemployed in the UK have hit a 17-year high of 2.57 million or 8.1 per cent. There has also been a record number of youth unemployed, with the number now close to the million mark.
Consumer Price Index-based inflation in the UK have also hit a new high of 5.2 per cent in September, well above the target of two per cent.
