Coffee House

Nigel Lawson versus Mervyn King

19 November 2011

In this week’s Spectator we have a piece from one of our former editors, Nigel
Lawson, where he confronts this idea that the West’s woes can be blamed on a new bogeyman called ‘global imbalances’. This is fast becoming the received wisdom, something that
even the bankers can point to and blame. It gets everyone off the hook, and takes attention away from the basic failure to regulate the supply of money and quality of investments. CoffeeHousers may
be familiar with the argument by now. Time and time again, we hear central bankers shrug their shoulders and say something like:

‘Don’t blame us central bankers and financial policymakers for the debt crisis. Yes, our job is to regulate the supply of debt — and yes, it may have been dangerously cheap
during the last decade. But that wasn’t our fault! It was those bloody Chinese! The scoundrels keep on working and saving — can you imagine?! And look what they’ve gone and done: a $3
trillion cash pile they’ve got in Beijing alone, before you count Korea and Indonesia. It would have been rude for us Westerners not to borrow it, and go fill our houses with
electronic gadgets bought on the never-never. The Eastern cash was just there: we had to take it. Didn’t we? So don’t blame us  central bankers for keeping rates too low for too long.
Blame those irresponsibly thrifty Asians! They are still now saving like lunatics and until they stop it there’s nothing we can do.’

Well, that’s my take. Lord Lawson phrases it rather differently. He says that these ‘imbalances’ have been with us through most of modern economic history, and a
properly-run country learns to deal with them. An extract from his piece:

‘I have the highest regard for Sir Mervyn, whom I have known well for many years, and who has proved an excellent governor during the most testing time within living memory. But on this
issue I believe him to be mistaken. As he put it: ‘What were the causes of the unsustainable build-up of debt in Europe and elsewhere? They lay in the continuing imbalance between those
economies running large current account surpluses and those running large current account deficits… Surplus countries, a group which includes three of the world’s largest four
economies [Japan, Germany and China], share a responsibility to respond to our present dilemma by expanding domestic demand.
This preoccupation with current account imbalances is hardly new. I remember similar fears about Japan during my time as Chancellor in the 1980s. But is this really an economic defect? For these
imbalances to be eliminated, capital inflows and capital outflows would need to be precisely the same — an implausible scenario. We are living now in what might be termed the second coming
of globalisation, the creation to a considerable extent of a single world economy, the first coming having been the remarkably successful half-century between the end of the American Civil War
and the outbreak of the first world war, a period justly dubbed la belle époque.
Nobody then lost any sleep over the current account of the balance of payments. Not least because the figures did not exist. But it is clear from the huge amount of overseas investment that
occurred, notably from the UK and other European countries into both North and South America, that the imbalances must have been substantial and persistent. There is nothing perverse about
Perhaps a domestic example might help. In the old days when house purchase in the UK was financed by building societies, far and away the largest building society in the country was based not in
London but in Halifax — now alas simply the ‘H’ in the failed Lloyds HBOS banking group. This was not because the people of Yorkshire were richer than the people of London and
the south: quite the reverse. But Yorkshire people saved, while southerners spent. So the Halifax Building Society came to dominate the UK housing finance market by channelling savings from the
poorer north to the richer south.
The Chinese savings surplus has clearly been exacerbated by what we would consider an inadequate social safety net. This obliges the Chinese people to save for their own protection: they will
have no welfare state to fund their retirement or help them if they fall sick. This will change in time, if only because the Chinese authorities are increasingly fearful of social unrest. But it
would be surprising if substantial imbalances did not persist. There is no use wishing them away, or blaming the Chinese for saving so much. The ready availability of cheap money is no excuse for
unwise borrowing or foolish lending decisions. And this is the heart of the problem.’

Lord Lawson is, as so often, on the money. Blaming the ‘global imbalances’ is very convenient for everyone — but, as they’re not going away any time soon, it is
not very constructive. Far better that we learn to deal with them, and ask why this global crisis didn’t fell any banks in Sweden, Canada or Australia. The answer is that they had a
properly-regulated banking system, and central banks which knew that there’s more to economic stability than a slavish devotion to an inflation target.

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Show comments
  • Michaelji

    November 20th, 2011 10:21am

    “Lord Lawson is, as so often, on the money”
    especially when it comes to choosing wives and lady friends. This puffed up vainglorious man blew away a generation of entrepreneurs by his policy of shadowing the Deutschmark

    .This cannot be restated or emphasised enough-how anybody could give this man ANY credibility is beyond belief. But I’m not sure which was his greatest bungle, shadowing the D-Mark or announcing the end of MIRAS 4 months in advanve and thus stoking an already overheated property market and luring in some of the most vulnerable who were despertate not to “miss out”.

    Of course Lawson then alked straight on to the Board of NatWest…

  • Hugo Chav


    I should have been more specific.

    What I should have pointed out was that 99% of the econo-politico elite are for QE to Infinity.

    I did not explain that clearly enough.

  • Kevin

    To summarise, I understand Lawson’s point to be as follows:
    Don’t blame British indebtedness on Chinese lending.

    I do not, however, see the connection with the conclusion of this article, which speaks disapprovingly of the monetary policy of targeted inflation.

  • Herbert Thornton

    Quantitative easing? Here’s the best definition of it that I’ve ever heard –


  • TomTom

    “The 99% are for QE to Infinity. Is this herd behaviour?”

    You are WRONG ! The 1% CONTROL the instruments and the rest are simply saddled with the COST.

    QE is purely to prevent Banks writing down their Commercial and Residential Loan Book to Market and wiping out their Equity. The 99% know they are being set up for VERY HIGH taxation and User Fees to fund the Bank Profligacy.

    Stop trying to make out the 99% demanded Merchant Banks merge with Jobbing Brokers and Commercial Banks and demanded Globalisation. It was BANKS that set the agenda since 1980s at least even though Heath did manage a Banking Crisis in 1973 with Midland being propped up by the Bank of England…..oh, and Johnson Matthey ? was that because the 99% demanded gold chains ?

  • Nick H

    Trevor-having spent quite a lot of time in Beijing in recent years I can assure you that there is plenty to spend your money on!!!

  • Occasional Ostrich

    daniel maris 19th, 7:32pm

    One’s tongue was in one’s cheek, presumably?

  • ellubo

    “Lord Lawson is, as so often, on the money”
    especially when it comes to choosing wives and lady friends. This puffed up vainglorious man blew away a generation of entrepreneurs by his policy of shadowing the Deutschmark.

  • Herbert Thornton

    daniel maris (Nov 19th, 7:32pm)

    I disagree. The Chinese may have a dirigiste form of government, but it is genuinely disposed to improve the lot of the Chinese population.

    You should also, I suggest, reserve the word “genocidal” for regimes that really are genocidal – e.g. for Hitler’s Nazis who exterminated so many millions of Jews and for the Muslim Arabs who, at the instigation of the Sudanese government, more recently conducted a campaign in which they exterminated so many black Africans.

    To describe the Chinese government as “genocidal” goes beyond being inaccurate – it is defamatory.

  • John Moss

    The greatest “imbalance” has been between what Governments collect in tax and what they spend.

    In the UK we have had 12 years of surplus and 53 years of deficit since WW2. We keep borrowing from our future and eventually, the music has to stop and we have to learn to live within our means.

    That means reducing spending on public services. We have to get used to it, there is no other way. Once our budget balances, we can start to reduce our National Debt, then over time, we can have lower taxes generating higher growth, higher tax receipts and can once again expand public services.

    But until the people realise they have to live within their means, they wil not vote for politicians who promise to do so.

    Letting off the bankers, regulators and politicians who landed us in this mess is easy to do, but it will not help and we will likely just repeat the cycle of austerity, some small recovery and then expansion of sovereign debt, yet again.

  • daniel maris

    Simple solution: stop trading with the genocidal Chinese dictatorship.

  • Herbert Thornton

    Fraser – when you write of “…basic failure to regulate the supply of money and quality of investments…” you hit the nail squarely on the head.

    So much so that I’d like, if I may, to repeat what I posted yesterday in response to Jonathan Jones’ piece headed ‘From the Archives: Fall of the Rock’ –

    “The practice of protecting loans by taking security for the money lent has evolved and branched out into labyrinthine webs of derivative transactions that have caused terrible harm.

    Surely it is high time that the law was changed to invalidate, or at the least, severely restrict the validity of, such transactions? It would even be desirable, I suggest, to go beyond restrictions on validity: the concoction of such schemes should also be prohibited by the Criminal Law.

    That would of course be a very serious undertaking for the politicians and for Parliamentary Law Drafting Counsel.

    On a lighter note it is tempting to suggest that the title to the necessary Act should be the Financial Smoke and Mirrors Prohibition Act.

    However, I feel sure that the first thing the politicians would demand would be that the draft Bill must be worded in such a way that the conduct of national financial business by Ministers of the Crown was outside the scope of the Act. They wouldn’t want somebody like Gordon Brown sent to jail, would they?”

  • Fex Urbis

    Well I wouldn’t hold my breath waiting for the silly fool King to say sorry. He is a failure of epic proportions, never saw anything coming, tells we’re all in a mess when it’s blindingly obvious to anyone with a pulse. He deserves to be ridiculed at every turn for his utter ineptitude.

    And to cap it all we’re not even allowed a chuckle at photos of this incompetent getting his well deserved knighthood. What did the citation say ‘For being a useless twat’?

    He should retire and spend his time watching sport which he seems to like on his own time rather than ours.

  • Heartless P.

    Ah, – “ … it wasn’t my fault … “ – the ultimate excuse used by the Great Economic Pretender, – may the memory of his rotten years never be forgotten, – and now wheeled out by whichever economic charlatan and financial parasite chooses to justify his – or her – wanton stupidity and greed.

    Quite agree that we need more articles in the same vein please.

  • TrevorsDen

    The Chinese have worked and saved because there is nothing to spend their money on. May be that is changing and things might be different in years to come.
    Of course since there is no democracy or accountability in China as we would know it then there is no pressure on the Chinese govt to pursue policies based on consumption.

    The point about saving for old age is well made. IUnder brown consumption was misread as growth whilst all the time people were laying their future open to destitution which the state could not afford to ameliorate, since the ‘growth’ was not providing the tax revenues to sustain grandiose social plans.

  • Dimoto

    Nigel Lawson is right and correctly describes the Chinese situation.

    But does he examine Germany and Japan ?
    I would love to know what their excuses are, they both have ‘social safety nets’.

  • Frank P

    From he noble Lord and you, I mean.

  • Frank P

    That essay is worthy of the Old Spectator, Fraser. More like this please.

  • dorothy wilson

    And here’s another possibility. Sweden, Canada and Australia did not have a Finance Minister who became PM and who had a Faustian pact with the banks. They could do whatever they wanted provided they paid enough in taxation to fund a supposed socialist utopia.

  • Hugo Chav

    Simon Nixon:

    “For the past 60 years, most governments in the developed world pursued variants of the same economic strategy: trying to minimize the cost of capital for the corporate sector by subsidizing the financial sector and using the taxes on the higher profits to fund ever more generous spending promises. The result was to turn the state into a giant insurance operation, underwriting tail-risks across the economy, protecting people from the consequences of economic mistakes or social misfortune.”


    Three books for Xmas:

    1. Currency Wars by James Rickards.

    2. Paper Money Collapse by Detlev Schlichter.

    3. Extreme Money by Satyajit Das.

    These three books will explain where we have been and where we are going.

    Are you in the 99% who don’t understand what’s going on? Join the 1% and rage against the machine.

    The 99% are for QE to Infinity. Is this herd behaviour?

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