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Queen’s Speech

My Lords, we may not agree, but I believe that the Government are fortunate to have the skills and experience of the noble Lords, Lord Mandelson and Lord Myners, at their disposal. This House is lucky that they are here, although I must add that it does not reflect too well on the quality of their colleagues in the other place. After the crash, I supported quantitative easing as designed by Bernard Bernanke, the chairman of the Federal Reserve. We were lucky that his scholarly knowledge of the great depression could be put to such practical use. The latest G20 meeting reconfirmed easy money for central banks and higher government spending. Anxieties about deflation reflected the conventional wisdom, partly on the apparent grounds that the size of spare capacity in the world required the further rattle of the printing presses. We are approaching the time when this conventional wisdom must be placed under scrutiny. An exit strategy from quantitative easing will be required before long. We must also deal with our public finances without risking inflation. Price stability used to be an aim, if not here then in Germany and the USA. Now that objective rejoices in the euphemism "stable inflation expectations". Key members of the G20, including the United Kingdom, may continue to portray the risk of deflation as an alibi for dodging essential fiscal and monetary action. This excuse cannot last much longer. Politicians and bankers must confront the gravity of their obligations. Alan Greenspan, as chairman of the Federal Reserve, erred by pegging interest rates at 1 per cent for three years after the dotcom boom. This encouraged the housing bubble and subprime fiasco. Yet in a Financial Times article in June, he sought repentance, highlighting inflation as the real threat to a sustained recovery. Greenspan warned that the pending avalanche of government debt to be unloaded on to the global markets made inflation a special concern. Nearer home, Spencer Dale, the Bank of England’s chief economist, has counselled against an increase in money-creation through the purchase of government bonds. He has also warned about the dangers of injecting further liquidity for fear of it igniting inflation; whereas the governor himself seems relaxed, regarding inflation as a temporary surge. Alas, the Bank’s forecasts often rival the Treasury’s for laxity. Let us hope that the governor is no longer influenced by his Cambridge mentors, Lord Kahn and Joan Robinson. Kahn preached the neo-Keynesian orthodoxy of the 1960s and 1970s that, ""the right aim of monetary policy is not to secure a stable price level"." His disciples still hover in the ante-rooms of influence, and their preferred drug is always demand. It is possible that the RPI will reach 4 per cent next year. Inflationary pressures are more evident here than in the USA and the eurozone. They should not be shrugged off as a passing apparition. They must be staunched at source. The case is clear. Oil costs are rising. The VAT reversal and stamp duty holiday will reach an end. Bond yields on two-year gilts are at a record low. Asset bubbles, such as property in the Far East, spell potential trouble and could multiply. The asset price index has risen by 60 per cent over eight months. The gold price seldom lies, while commodity brokers in the Chicago pits are licking their lips. And, of course, sterling is weaker. This will swell inflation as consumers pay higher prices for imported goods. As for stronger exports, look no further than the enormity of our trade deficit—1997 was the last year when the UK registered a surplus. The British are prone to inflation as a genetic disease. To those of us involved with inflation battles 30 and 40 years ago—it took time to win the war—an undimmed principle stands out. Inflation cannot maintain high levels of employment in any but the shortest term. In the longer run, to keep up employment, larger doses of the drug are needed, accelerating inflation still further. The outcome is high unemployment, misery and potential social unrest. We recover without inflation, or we do not recover at all. The UK Government must tackle the fiscal deficit, the worst of any major nation within a credible framework. Otherwise, inflation becomes a higher risk, with unsettled bond markets. The leadership of the Government which carries out these duties will need to make hard choices and display courage seldom shown by contemporary politicians. The task ahead is not about the management of tonight’s news and tomorrow’s headlines, or about pacifying the unions or the CBI, or about massaging pressure groups and vested interests. It is about a clear and unyielding sense of direction underpinned by conviction and fortitude, which were qualities required and found 30 years ago and now called for once more in the national interest.