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26 March 2012


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Ian Jenkins

To be effective a fiscal council/commission needs to be independent of government."
Effective? This calls for an international perspective.
State capitalism is on the rise. Independence from national politics seems to have little future. For example, more quantitative easing is on the cards in the US, according to a speech this week by the chairman of the Federal Reserve; aggregate demand is insufficient to cut unemployment quickly enough. National politics is likely to have the final say.
Of course savers and the international order can suffer hugely from the weakening currency that national QE causes. Perhaps this is thought to be a price worth paying for societal stability in the short term in a nation - Germany thought so, but later changed its mind [see below]. And the price will escalate - for starters it has been estimated that $trillions of debt will have to be written off before the US and Europe have sustainable economies. Then pay rates will have to fall substantially over decades to be competitive - moreover technology is rapidly reducing the number of jobs the world needs.
In a recent book, the Economist's Philip Coggan refers to the inflationary policies introduced by the government of Germany in the 1920's:
"As the domestic economy became worthless, sellers demanded foreign currency; tourists could live the high life on a few dollars a day. For much of this perod, the wages of skilled workers kept up with the price rises. Industrialists and aristocrats also survived, as their debts were devalued in real termsand as land values rose. But the middle classes, who relied on savings income to supplement their salaries, were ruined."
The loose 'rules' of economics largely led to WW2. After the devastation of the world war, the Germans gave their central bank the responsibility to set monetary policy - preventing politics from interfering in the way foward in matters of finance. Bank officials were determined to avoid the earlier mistakes. The exclusion of politics has moderated there but Germany continues to prosper.
Should the loose regulation of finance in key nations be tightened up? The House of Lords thought the checks and balances in the UK were satisfactory, and asked why auditors didn't bark to alert us to the financial collapse. Unfortunately there was a fundamental flaw - audit is not independent of national government. New enforceable rules are necessary.

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