A downward cycle


There's a tide in the affairs of men, which, taken at the ebb, can land you on the rocks in short order. I am beginning to wonder whether America, Britain and other leading economies are indeed launching themselves onto the rocks.

Anyone who has read their Hayek knows how it works. Central banks hate recessions. So they keep interest rates low. People borrow to buy homes and other assets. The bankers see the bubble and rein back. Borrowers and their banks run out of cash. Governments bail everyone out and print more money. Public debt soars and the currency falls in value. Foreign investors get cold feet. Bankers raise interest rates to restore confidence. Everyone is squeezed, and consumer spending falls. There's a recession. Governments bail everyone out and print more money, and off the cycle goes off again, round and round, until eventually you get stagflation, hyperinflation, and a huge collapse.

Arguably Britain is now on this cycle. The pound lost a third of its value against the dollar over 2008-09, and despite recovering a bit it has fallen sharply again. And let's face it, the dollar isn't in great shape either. The British media say that the fall in recent days has been because of polling fears of a hung Parliament come the election of (probably) May 6. Actually, it is more like fear of Gordon Brown's high-spending, high-borrowing government being re-elected. Investors know that Britain needs tough action to sort out its financial position, and there seems little chance of that if Brown stays in power. One part of me thinks it would be no bad thing if Britain fell weeping into the arms of the IMF. It would be painful, but at least they would sort out the mess and stop the downward cycle.