But after you have saved the world, Mr Brown, what then?
Barack Obama sees the dangers in his own plan. But does our Prime Minister?
By Charles Moore 09 January 2009 • 8:08pm
Suppose – an increasingly rare supposition, I fear – that you are a British citizen in work, with a little bit of money at the end of each month. What are you now supposed to do with it?
In uncertain times, you might think you should save it, but Gordon Brown and the Bank of England are telling you, by their actions, that this is an unpatriotic thing to do, and certainly an unprofitable one. I recently received a letter from my bank – fresh from its triumph in investing with Bernie Madoff – about my "savings" account. It informed me that, from now on, the rate paid out on balances under £25,000 would be 0.000 per cent. And that was before this week's interest rate cut.
So, if you shouldn't save it, should you spend it? Everywhere there are sales, and the potential customer is bombarded with offers. A cut price now feels like a given of any purchase. This week, walking past shop windows red with sale signs, I saw a tie which I wanted to buy. I went in and asked if it was in a sale. The assistant said not. I felt outraged, as if some human right had been infringed (and I didn't buy the tie).
And yet if it is true that we are suffering deflation – the figures for the last three months in the United States suggest an annualised deflation rate of 15 per cent – the consumer should resist cut-price blandishments and hold on. His cash will grow more powerful as prices fall.
So the most logical thing for most people (except, perhaps, for those in a secure public sector job) to do at this point is nothing. Don't save long-term, don't borrow, don't spend. Just watch and wait.
This is a highly unusual and unsatisfactory state to be in. Normally, the signals are fairly clear – a good moment to borrow to buy or sell a house, the right chance to put money into one's pension, or a time to get rid of shares etc. They reflect the direction of an entire economy. Now we do not have a direction – or rather, we cannot see what it is.
As one watches and waits, one sees actions that would normally be melodramatic becoming commonplace. When Northern Rock collapsed, people spoke of the possibility of nationalisation as a piece of prehistoric socialism. Today, the nationalisation of all the big banks is considered a serious – even a sensible – policy by plenty of conservative commentators.
In America 18 months ago, the Fed was lending about $100 million to the private sector at any one time. Today, it is lending $1.5 trillion. It has turned itself into the financial equivalent of one of those National Enterprise Boards for industry so beloved of the corporate state in the 1970s.
In 2007, the British national debt was 36 per cent of GDP. By 2011, it is projected to be 56 per cent. Change on that scale is usually brought about only by war.
If this is the equivalent of war, what I want to ask – as critics did over the invasion of Iraq – is, "What is the exit strategy?" I accept, reluctantly, that Mr Brown had to step in with our money to save the banking system. I understand that only government has the money power to tide us over this crisis of confidence. But I would very much like to know where we are headed, and when all this government activism will stop.
In his speech on Thursday about his Recovery and Reinvestment Plan, President-elect Obama made Rooseveltian noises about repairing "crumbling roads, bridges and schools" and other public investment. But he was equally careful to include qualifiers. He wanted to eliminate "unwise and unnecessary spending", he said. There could be no recovery unless America was seen to be "getting our fiscal house in order".
Mr Obama spoke up for government all right, but he wanted to make it clear that government intervention was an "extraordinary action", and its purpose was to give a "short-term boost". He was thinking ahead to the moment when the bond markets might decide that government finances are impossible, and when inflation, so long sleeping, reawakens.
Mr Brown, of course, cheered Mr Obama. He sees the coming President of the most powerful nation on earth as his St Peter – a vigorous assistant in his own more exalted destiny of saving the world. But he is not, in fact, saying the same thing as Mr Obama. There is no Brown acknowledgement of the danger ahead – of inflation following on deflation, and of government stifling the recovery it seeks.
There are three reasons for this. The first is that, while Mr Obama, being new, bears no blame for where we are, Mr Brown does. He therefore cannot tell the truth about our terrible public finances. If he cannot admit what went wrong, he cannot explain how to put it right.
The second reason is that, psychologically and ideologically, Mr Brown has great difficulty in seeing that government intervention – especially by a government run by him – could possibly be a bad thing. You will often read that he has "a spring in his step" in this crisis. He does, because he has brought about a situation for which he has always longed – one in which the individual and non-state institutions lie prostrate before government power. He has re-created the conditions for socialism.
Which leads us to the third reason for the lack of an exit strategy – politics. David Cameron is surely right in his long-held view that, with Mr Brown, political calculation always comes above everything else. The Brown calculation is that his anti-deflationary measures now will make things feel better in time for the general election. If he were following Milton Friedman's idea of throwing public money out of a helicopter to revive the economy, his flight path would be guided not by his moral compass but by a map of marginal constituencies.
And if anyone spoils the fun by pointing out that his spending and borrowing are unsustainable, Mr Brown will try to make him the victim of the people's wrath. Suppose, towards the end of this year, that Mervyn King, the Governor of the Bank of England, tries to put up interest rates in order to prevent the inflation we are currently stoking up. Well then, Mr Brown will have his rhetoric ready about how central bankers are standing in the way of the prosperity of the workers. And who, after the last few years, will wish to defend central bankers?
So no, Mr Brown does not have an exit strategy. He has an entry strategy – re-entry into the world of the 1970s which we all believed we had left behind. If voters are frightened enough, they might even embrace it, as they were tempted to embrace Callaghan's Social Contract in 1978.
How to counter Mr Brown? That is a big subject for another day. All I shall say now is that the return of Ken Clarke would no more save the Tories than a late comeback for Denis Healey would save this government.