When a politician prefaces a remark with the phrase "with all due respect", you know that he's about to say something designed to communicate the full extent of his contempt for the views and intelligence of the recipient of this "respect". Seldom can this rhetorical device have been used to more effect than by Germany's finance minister, in his remarks last week about the conduct of America's economic policy.
"With all due respect," said Wolfgang Schäuble, "the US policy is clueless". Dr Schäuble – whose verbal vigour has not been in the least impaired by being hospitalised for much of this year, the legacy of the devastating injuries caused by a would-be assassin's bullets – was speaking after the US Federal Reserve's decision to throw a further $600bn like confetti to stimulate its flagging economy. "They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money. The results have been hopeless."
That was last Friday, at a speech in Berlin. If the Americans had made any back-door diplomatic attempts to get the German Finance Minister to ease off, then they were not successful. Yesterday Schäuble gave an interview for Der Spiegel in which he declared that America should learn some lessons from Germany's recipe for economic recovery growth: "[Our] successes are not the result of some sort of currency manipulation ... The American growth model on the other hand is in a deep crisis. The US lived on borrowed money for too long, inflating its financial sector unnecessarily."
This all portends more fireworks at the summit of the Group of 20 leading economies later this week in Seoul. It is the clearest indication that Europe's leading economy will side with China in accusing America of deliberately debasing the dollar, in an attempt to inflate its way out of recession. If it were just a question of the consequences for the American economy, Schäuble's observations would perhaps not be so relevant in the run-up to an international summit; but the point, of course, is that the dollar remains the world's only reserve currency, in which commodities such as gold and oil are priced: thus the accusation is that the US is deliberately infecting the entire global trading system with a very nasty dose of inflation.
In strict logic, that effect on commodity prices should not be a problem for other nations, such as Germany – or indeed the UK. If the dollar depreciates rapidly against the euro or sterling, then the real cost to us in Europe (expressed in euros or pounds) of goods such as oil and copper, will not be affected. Yet what worries the Germans above all is the inflationary expectations that visibly spiralling commodity prices bring in their train. And here we see the huge influence that a nation's past has on its present conduct and interpretation of events.
Even today, every young German is lectured in schools about what happened when the Weimar Government of the 1920s, facing the challenge of paying the nation's war debts, printed money rather than face up to the need to reduce public expenditure and raise taxes. Now, no one is saying that America's latest bout of so-called Quantitative Easing is in itself the inevitable prelude to Weimar style – or even Zimbabwe-style – hyperinflation. Yet equally, the apparent insouciance of the repeated expansionary bursts in the Fed's balance sheet – not by physically printing money, but by the modern method of a click on the computer terminal – is a product of America's own bad memories of past troubles.
The Fed's chairman, Ben Bernanke, in an earlier academic incarnation, had devoted himself to years of study of the causes of the Great Depression. He concluded – along with his mentor Milton Friedman – that the principal reason America moved from recession to slump in the 1930s was that the Federal Reserve of the day had reduced the money supply, when it should have been doing everything it could to loosen monetary conditions.
In 2002, when the spectre of deflation was (quite wrongly) being seen as a threat to the American economy, Bernanke observed that this was not going to be a real problem because "the US Government has a technology, called a printing press (or today its electronic equivalent) that allows it to produce as many US dollars as it wishes at no cost". He added that: "People know that inflation erodes the real value of the government's debt, and therefore that it is in the real interest of the government to create inflation."
Indeed they do, which is one reason why the German and Chinese governments are so cynical about Bernanke's motives for injecting yet more hundreds of billions of dollars into the system: they, after all, are the creditors.
Yet it is not just foreign governments who might be hideously short-changed by a deliberate policy of reducing US debts (both corporate and federal) through inflation. Any British pensioner whose savings schemes partly comprise US Treasury bonds (or indeed any dollar-based assets) will feel the pain acutely. In fact, British pensioners have reason to feel similarly aggrieved at their own government. The Bank of England, with Treasury approval, has had its own programme of quantitative easing, conjuring up £200bn out of thin air, flooding the banks with liquidity – and which so far does not appear to have boosted lending in the way the authorities had either hoped or predicted.
The economics editor of Channel 4 News, Faisal Islam, has just produced a stark and lengthy analysis of the British experience of QE for Prospect magazine. The former Chancellor, Alistair Darling, tells Islam, with shocking candour, that "nobody really knows what impact it's having ... Look at the minutes of the Bank of England's Monetary Policy Committee, even they are split".
Islam also spoke to Richard Koo, the chief economist for the Nomura Research Institute and the leading expert on the Japanese experimentation with this form of monetary stimulus. Koo's observation, after years of studying this phenomenon, is that no amount of quantitative easing will make people who already feel over-indebted decide to borrow more and thereby stimulate the economy. That was the Japanese experience, and it may well be the British one.
Of course, the reason why the American and Japanese authorities attempted this form of monetary mouth-to-mouth resuscitation is that, once interest rates were effectively zero, and government borrowings already dangerously high, there seemed to be no other form of stimulus available. You might say it was a demonstration of the principle of action in a crisis outlined by the hapless politician Jim Hacker, in Yes Minister: "Something must be done. This is something. Therefore we must do it."
Hacker was ever the short-termist, never willing to contemplate the consequences of his actions beyond the panic of the moment. It is precisely this criticism that the German Finance Minister is making of his US counterparts; and however much it might grate to hear a somewhat arrogant German lecture them on the conduct of their own affairs, there will be many Americans who know that it needed saying – "with all due respect".Reuse content