Rather like the MPC, the owners of Quantitativeasing, winner of all three of his races in 2009, have yet to decide how many outings he will have in 2010. They are waiting for race conditions to become clearer. The bold action, taken both at home and abroad, helped to end the collapse in confidence and spending last year. But equally bold action will be needed to prevent a similar crisis from recurring. The origins of the crisis lay in our inability to cope with the consequences of the entry into the world trading system of countries such as China, India, and the former Soviet empire – in a word, globalisation. The benefits in terms of trade were visible; the costs of the implied capital flows were not. The new entrants adopted a strategy of expanding manufactured exports to create employment. High rates of saving depressed domestic demand. So substantial trade  BIS Review 4/2010  1  surpluses were required to keep total demand in line with supply. Equally, the countries importing those manufactured goods ran trade deficits and required low saving rates to maintain balance in their economies. Everyone seemed to gain. High-saving countries created employment, and low-saving countries enjoyed faster consumption growth as cheap imports meant that living standards rose by more than the increase in production – worth around half a percentage point a year in the United Kingdom. These were the benefits of greater trade. But the pattern of poor countries saving a lot and rich countries borrowing was not sustainable.
Provided monetary growth remains well under control – and remember that at present it is undesirably low – inflation should return to target in the medium term. I hope you will all remember that in both of the past two years inflation picked up as a result of temporary price level factors and then fell back, as the MPC had predicted. So how will 2009 be remembered? As I said at the outset, it is too early to tell. The full impact of the financial crisis has yet to be seen. And the national statisticians will take another two years or so before providing their best estimates of spending and output in the UK economy. More importantly, the question of whether basic reforms to the structure of banking and the international monetary system will be made before another crisis engulfs the world economy remains unanswered. BIS Review 4/2010  5