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6.25 pm
Mr. Denzil Davies (Llanelli): I expected the hon. Member for Wycombe (Sir R. Whitney) to speak about the euro, and hon. Members probably expect me to refer to that subject. However, like the hon. Gentleman, I will not. I have been mildly surprised by, and taken some pleasure in, the four speeches--including that of the Chief Secretary and those from the Labour and Liberal Benches--about the euro in this debate. The European movement is clearly in a bit of a panic.
It has been a bad week for euro enthusiasts. I know that because they have come to this place and co-ordinated or harmonised--I hate to say "orchestrated", as I am sure that that is too strong a word--their views. That is what we have heard today. I do not need to say anything about the euro because panic has clearly set in. I await with interest further debates about the veto, which will no doubt occur after the Chief Secretary has been liberal with Britain's use of it. I shall wait and see what happens.
I intend to speak about the Gracious Speech and the Government's reiteration of their commitment to an economic orthodoxy that prevailed for much of the 1980s and throughout the whole of the 1990s. That orthodoxy is now apparently summed up in one word. The word is stability and stability is the word. As I understand it, "stability" encapsulates three separate economic strands: price stability, balanced budgets and the oligarchy of the central bankers. Those three create a kind of economic trinity. So the word becomes three and the three become the word.
In his recent speech to the City, my right hon. Friend the Prime Minister is reported to have said--I only read the headlines these days--that stability is "sexy". As a Welsh Calvinist, I am not quite sure what he meant. However, I cannot help thinking that sex sometimes unleashes powerful forces that can make a mess of stability. So I am not sure whether the two always go together. To extend that analogy to the economy, there are powerful forces at work in the global economy and they are the antithesis of the powerful forces that begat the present economic orthodoxy.
The powerful forces that begat the economic trinity were the forces of inflation. However, the powerful forces that we see at work in the economy now are the forces of deflation. Therefore, the danger as I see it--nobody can foretell the future--is that stability and the present orthodoxy not only are unable to provide any bulwark against global deflation, but will give a fresh impetus to global deflation, driving prices even lower.
It is difficult to predict the future and to analyse the present. However, most people would agree that prices--not their general level, but the rate of inflation--are falling in most western countries. Farmers are getting less money for their produce. Hon. Members will be interested to learn that a newspaper states today that the price of hogs on the Chicago merchandise mart is at its lowest level in 27 years. The pig cycle is really loose in the land. I do not know about the economic cycle, about which Treasury Ministers talk. I do not know whether that lasts for seven years, 14 years or what. Clearly the pig or hog cycle is still with us.
The price of crude oil is now $10.30 a barrel, which is its lowest price for a long time. The prices of manufactured goods are falling in most western countries. In September, in euroland--the area encompassing the 11 countries that will join the single currency on 1 January--the retail price index or its equivalent was 1 per cent., so prices were rising generally by 1 per cent. In Germany, price inflation is close to zero, and in France, it is not much higher.
There is no need for me to go into detail about why there has been a fall in prices. Most hon. Members understand that global economic forces, the freedom of trade and capital and a lack of barriers have brought us back to a pre-1914 world where trade and capital move freely. The technological changes of the past 20 or 30 years have brought about a reduction in costs and greater efficiency and made it easier for other countries to compete with western nations. Enormous global competitive pressure, quite apart from macro-economic policy, is pushing prices down. To maintain their profit margins, larger companies increase their capacity. They produce more goods at the lower prices. We have an industrial hog cycle, as prices are driven down even further.
We tend to forget that the first country that suffered from all that--Japan--is the second most powerful in the world. That was some time ago. Whatever we think of price stability, Japan has plenty of it. I do not know whether the Japanese are enjoying it, but they do not need it. With the fall in prices in Japan came a fall in interest rates. I do not know whether interest rates automatically follow prices or whether the Japanese central bank reduces interest rates as a result of a fall in prices, but the two are connected. The bank rate of interest, or its equivalent, in Japan is now about 0.5 per cent.
Low interest rates did not stop the fall in prices because there is now general deflation in Japan as price rises fall below zero.
The fall in interest rates had two consequences. First, it reduced banks' profits. Banks are certainly not popular on Government Benches and perhaps they are not popular in the country as a whole, but even banks have to make profits. If interest rates fall to 0.5 per cent., there is not much room for banks to make profits. No doubt, banks can charge more for cashing cheques or other services, but, in the main, bankers make their money by borrowing at one rate and lending at another. An interest rate of 0.5 per cent. did not give Japanese banks much of an opportunity to make profits, and that had an effect on the Japanese economy.
Secondly, and more importantly, low interest rates led to asset inflation. Retail prices may have fallen but being able to borrow at such low interest rates meant that the Japanese were able to purchase shares. More importantly in Japan, they were able to purchase more land and property. That asset boom eventually went bust, and the Japanese economy is still in a terrible state.
I shall deal now with the largest and most important economy in the world--that of the United States. We have heard in this debate and read in the newspapers what a wizard Dr. Alan Greenspan is. I am sure that he is, but let us, on these Government Benches, be radical for a change and dare to criticise him. I heard a sharp intake of breath from one of my hon. Friends, but I shall chance it.
Dr. Alan Greenspan, the chairman of the Federal Reserve, is not a happy bunny. I do not know whether one should call chairmen of central banks bunnies, but he is certainly not happy. For some time, I have detected panic in his pronouncements. Before the Russian crisis, Wall street was soaring to dizzy heights. Dr. Greenspan could do nothing. He went before Congress; he wrung his hands. Sometimes he sounded more like an amateur psychologist than the governor of a central bank when he deplored the irrational exuberance of Wall street. I do not know whether exuberance can ever be rational. He was worried, but the Russians gave him an escape route, at least for a short time. He did not have to put up interest rates to stop asset inflation on Wall street because the Russian crisis meant that there was deflation anyway.
Dr. Greenspan panicked again. He tried to save a ropy secondary bank, which is now called a hedge fund, and reduced interest rates three times in two weeks. Things were all right for a while, but share prices in the United States are rising again. They did not go up today or yesterday, but they are almost back to the pre-Russian crisis levels. Why? Because the costs of borrowing have been reduced and people can again borrow to buy shares.
Dr. Greenspan is worried about his constituency. He may be a central banker, but he has a constituency--Wall street. American consumers are not saving money and are using asset inflation on Wall street to buy goods. They are also almost totally dependent on share prices in Wall street for their retirement pensions. Dr. Greenspan is therefore locked into his constituency of Wall street. He is desperate and he is afraid to put up interest rates in case he brings down share prices. That affects American consumption, which affects most of the world.
Dr. Greenspan is not a happy bunny, but one central banker--Mr. Duisenberg--is a very happy bunny. I hope that I have pronounced his name correctly.
Mr. Radice:
It is pronounced Doysenberg.
Mr. Davies:
My colleague from the European Movement tells me that it is Doysenberg.
Mr. Duisenberg is a happy bunny. He is the happiest central banker in the world. He has a job that will last eight years; nobody can sack him. He is accountable to no person, only to a treaty, which must be nice because there is nothing behind the treaty apart from the European Court of Justice. He does not have to worry about a single Government or a powerful stock market, as does poor Dr. Greenspan. There is no Wall street to worry about when Mr. Duisenberg makes decisions. All he has to do is ensure price stability, and he is getting there. Inflation is down to 1 per cent. One more heave and Mr. Duisenberg will have achieved zero price inflation in western Europe. He is indeed a happy bunny.
There may be 16 million or 17 million unemployed people in western Europe. I do not know how many there are in euroland, but the figure is probably about 15 million. Mr. Duisenberg does not have to worry about that. He is accountable to the treaty, which includes only a few bland words about high employment.
What about the Bank of England? I do not know whether steady Eddie is a happy bunny. He is probably fairly happy because he has not done too badly. He has hit the 2.5 per cent. inflation target three times. As the hon. Member for Louth and Horncastle (Sir P. Tapsell) mentioned, there used to be leads and lags. I do not know what has happened to them these days. I wonder whether the hitting of the target three times is due to the brilliance of the Monetary Policy Committee or to a fluke. Perhaps we will never know.
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