Giving the economy enough rein

Excess supply in the economy is where the horse is tired and does not want to run anymore

In his recent keynote speech at the CISI Private Wealth Management Conference, Roger Nightingale predicted that we have very difficult economic and political scenarios ahead of us – scenarios, he added, which will not be aided by a fundamental lack of confidence in our politicians and Treasury and Central Bank officials.

The experienced economist believes that the issues central to today’s economy and ones which the new governor should consider carefully are its ‘two long-term conditions’ – excess demand and excess supply. Describing excess demand as an eager horse that is, crucially, controllable, he corresponds it with the condition of excess supply whereby the horse is tired and does not want to run anymore. If you were to ‘shorten the rein’, instead of slowing to your controlled pace, the horse would stop immediately and then you would be in very real trouble.

His argument, and his advice to the incumbent, is that if your economy is in the ‘condition of excess supply’, the central bank should not raise interest rates and neither should it tighten money because, in his own words, ‘you risk depression and a whole generation of very dull conditions indeed.’ Nevertheless, Nightingale also states that the financial sector, banks apart, will in fact do well in the next few years ‘as long as excess supply continues’ as this will lead to ‘low inflation driven particularly by low-ish pay supplements.’

Finally, the question of confidence is a pertinent one as we have every right, according to Nightingale, to have none in our politicians. He cites the former president of the European Central Bank, Jean-Claude Trichet, as an example of someone who knows that he has made some colossal mistakes but cannot admit it in public. Furthermore, not admitting a mistake compounds the original error. An unwillingness to publicly acknowledge mistakes goes hand in hand with an opaque outlook and, as Nightingle states, ‘The mere fact that [looking forward] is difficult doesn’t mean that you should stop doing it.’

Only time will tell whether Paul Tucker, Adair Turner, Gus O’Donnell or whoever becomes the new governor will be able to give the horse the right rein.