Us Faces Same Problems As Greece, Says Bank Of England

[interestrateripoff]

http://blogs.telegraph.co.uk/finance/edmundconway/100005657/us-faces-same-problems-as-greece-says-bank-of-england/

Mervyn King, Governor of the Bank of England, fears that America shares many of the same fiscal problems currently haunting Europe. He also believes that European Union must become a federalised fiscal union (in other words with central power to tax and spend) if it is to survive. Just two of the nuggets from one of the most extraordinary press conferences I have been to at the Bank.

What with all the excitement yesterday over our new Government, I never had time to remark on the Inflation Report press conference. Most of our attention was on what King said about the Government’s fiscal plans (a ringing endorsement). But, as Jeremy Warner has written in today’s paper, it was as if King had suddenly been unleashed. Bear in mind King is usually one of the most guarded policymakers in both British and central banking circles. Not yesterday.

It isn’t often one has the opportunity to get such a blunt and straightforward insight into the thoughts of one of the world’s leading economic players. Most of this stuff usually stays behind closed doors, so it’s worth taking note of. And I suspect that while George Osborne will have been happy to hear his endorsement of the new Government’s policies, Barack Obama and the European leaders will have been far less pleased with his frank comments on their predicament.

The transcript and video are online at the Bank’s website, but below are the extended highlights, all emphasis mine. Well worth checking out.

America, and many other large economies including the UK, share some of the same problems as Greece with its public finances:

Every country around the world is in a similar position, even the United States; the world’s largest economy has a very large fiscal deficit. And one of the concerns in financial markets is clearly – how will this enormous stock of public debt be reduced over the next few years? And it’s very important that governments, both here and elsewhere, get to grips with this problem, have a clear approach and a very clear and credible approach to reducing the size of those deficits over, in our case, the lifetime of this parliament, in order to convince markets that they should be willing to continue to finance the very large sums of money that will be needed to be raised from financial markets over the next few years, at reasonable interest rates.

On why Europe will have to become a federalised fiscal union:

I do not want to comment on a particular measure by a particular country, but I do want to suggest that within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work. But if that is to happen there needs to be also a mechanism to enable other countries that have lost competitiveness to regain competitiveness. That requires actions, probably structural reforms, changes in wages and prices, in the countries that need to regain competitiveness. But it also needs a solid and expansionary state of domestic demand in the stronger economies in Europe.

On the deficit:

The most important thing now is for the new government to deal with the challenge of the fiscal deficit. It is the single most pressing problem facing the United Kingdom; it will take a full parliament to deal with, and it is very important that measures are taken straight away to demonstrate the seriousness and the credibility of the commitment to dealing with that deficit.

Why it is right that the Government wants to cut spending as soon as this year:

We see the recovery beginning to take place, and we expect that the pace of that recovery will pick up. But we’ve also seen the market response in the past two weeks, where major investors around the world are asking themselves questions about the interest rate at which they are prepared to finance trillions of pounds of money that will need to be raised on financial markets in the next two to three years, to finance government requirements around the world. And that I think has been a sobering reflection of what can happen if you don’t make very clear at the outset – I think markets were not expecting any action before the election. After the election they need and they want a very clear, strong signal and evidence of the determination to make it work.

And I think that it’s quite difficult to make credible a commitment to fiscal consolidation if all the measures are somehow in the future. You need to start and get on with it….

I don’t believe that the scale of those measures, the £6bn cuts, is likely to be such as to dramatically change the outlook for growth this year. And as I said earlier in response to answers, I think it does reduce some of the downside risks by taking away some of the market risk that might have occurred if there’d been a sharp upward movement in yields.

On Greece:

I think the lesson from Greece is that, if the problem had been dealt with three months ago, it would not have become as serious as it subsequently became. And I think the important thing now is that Greece has been dealt with a major IMF and European Union package…

But those measures provide only a window of opportunity. They do not affect the total amount of debt, in themselves which countries around the world have to repay. The markets, which some of our European partners like to describe as speculators causing difficulty, are the very same markets where the public sector is looking to provide trillions of pounds of support to finance public debt around the major countries in the world over the next few years.

What matters is that those investors are prepared to buy government debt at interest rates which make it tolerable for the countries concerned. And that is why it is important for each and every country to demonstrate that they are on top of a programme for their country to reduce the fiscal deficit to a sustainable path.

That has been the big message, but within the international community I think there is a very clear understanding that the package of financial support which was made available at the weekend is not an underlying solution to the problem. It provides a window of opportunity which gives governments the chance to put their house in order; and it gives the international economic community a chance to talk about what I think – and have always said for some considerable time – to be one of the major issues facing us, which is the need to rebalance demand around the world economy.

Mystic Merv at his finest....

[Bloo Loo]

The debt is real...till everyone defaults, then it was just a mote in a bankers eye.

[OnlyMe]

Every country around the world is in a similar position, even the United States; the world’s largest economy has a very large fiscal deficit. And one of the concerns in financial markets is clearly – how will this enormous stock of public debt be reduced over the next few years? And it’s very important that governments, both here and elsewhere, get to grips with this problem, have a clear approach and a very clear and credible approach to reducing the size of those deficits over, in our case, the lifetime of this parliament, in order to convince markets that they should be willing to continue to finance the very large sums of money that will be needed to be raised from financial markets over the next few years, at reasonable interest rates.

Why this parliament, specifically?

Why were rates dropped and QE used to allow Gordon "Prudence" Brown to carry on borrowing like a loony and create the deficit in the first place?

[davidhpc]

Hahaha, King changes tune as new government takes charge, to try and cling to job and multi-million pound pension pot... why am I not surprised? slimeball.

[1929crash]

http://blogs.telegraph.co.uk/finance/edmundconway/100005657/us-faces-same-problems-as-greece-says-bank-of-england/

Mystic Merv at his finest....

Well, the US as an empire is overreaching itself by spending too much on the military, too much on war and way too much on Goldman Sachs and their cronies.

And it's paying for this by borrowing from China.

So China is paying to protect central and west/south Asia from itself! Incredible!

[billybong]

The saviour of the world is gone and a new one arises and looking after his job (and pension) changing his tune from print money print money style policies and expecting "investors" to subsidize his ZIRP strategy - to this latest tack. Likely if NuLabour had got in he'd have been banging on now about how all the old policies had been so brilliant and they should keep doing them - with the recovery being so locked in and all.

And if the US is like Greece then the UK's economy must be in really dire trouble and even worse than Greece.

Is this "window of opportunity" going to last 5 years i.e. the length of a full parliament. Maybe he's implying the coalition won't last the full 5 years and they'll have to get on with it rather quickly.

Edited May 14, 2010 by billybong

[OnlyMe]

Notice that today sterling is falling to lows again aganst the dollar.

Time to have a quick pop at the US to stop sterling falling into the abyss?

Maybe time to remove money devauluing shitheads from their positions.

[Bloo Loo]

snip

Is this "window of opportunity" going to last 5 years snip

no, its just wind.

[A.steve]

Has anyone found the video that's supposed to be on the BoE website?

I'd like to listen first-hand and avoid making judgements through the politicised commentary in the papers...

[Traktion]

Sounds like Mervyn feels the need to take the gloves off and about time too.

He is completely right about the Euro zone too. Either become the United States of Europe () or break it up. The single currency experiment is reaching its conclusion: no, you can't have a single monetary union, without full political union.

Would current Euro zone countries want to give up their right to be sovereign nations? I very much doubt it, so therefore it will slowly break up, with the wealthy countries leaving the poorer ones to their printing press. Once again, HPC has been on the ball on this one, IMO.

The question is, how long will it take to unravel? 5 years? 5 months? 5 weeks? 5 days? I have no idea, but I get the feeling that as soon as one of the big countries pulls the plug, others will quickly follow until the Euro is left in tatters.

[RichB]

Hahaha, King changes tune as new government takes charge, to try and cling to job and multi-million pound pension pot... why am I not surprised? slimeball.

Or because he knows this lot might not chuck nokias at him...

[MinceBalls]

The saviour of the world is gone and a new one arises and looking after his job (and pension) changing his tune from print money print money style policies and expecting "investors" to subsidize his ZIRP strategy - to this latest tack. Likely if NuLabour had got in he'd have been banging on now about how all the old policies had been so brilliant and they should keep doing them - with the recovery being so locked in and all.

And if the US is like Greece then the UK's economy must be in really dire trouble and even worse than Greece.

Is this "window of opportunity" going to last 5 years i.e. the length of a full parliament. Maybe he's implying the coalition won't last the full 5 years and they'll have to get on with it rather quickly.

erm... he said a few days ago that the BoE have not 'ruled out' more QE and that ZIRP will be with us for a long time. Changed his tune? No. Saying what he thinks he needs to say in order to remain in his privilaged position. Definitely.