Interview
massive events whose economic impact on a one-year view was really very small. So I don’t think this is going to have a material impact on global growth, although things that can have a small economic impact can have huge political impact. I think it’s important to disentangle the two. Clearly the rise of ISIS is geopolitically an enormous new factor in Middle Eastern politics, but I don’t think that necessarily means that it’s a game changer for global growth. I think, actually, that’s a caveat – so perhaps the most surprising thing about not only ISIS but also the Gaza conflict is that neither of those events have had any perceptible effect on oil prices, which has been one of the traditional channels by which tension in the Middle East transmits itself to the Western world. Just leading on from that, you don’t think that there’s going to be any effect on oil prices with the ISIS conflict? Well what’s interesting is that the arrival of ISIS on the scene over the summer, which I think is a massive shock and unexpected in the West, has been accompanied by the oil price falling to its lowest level in 5 years – below $80 a barrel. I think that may partly be because the monopoly power of OPEC has been eroded by the growth of fracking in the United States. There are suggestions, too, that Saudi Arabia has continued to pump oil and that there may be geopolitical considerations for Saudi in maintaining a lower oil price in terms of undermining both Russia and Iran – I wouldn’t have a view on that. But what is striking is that this chaos in the Middle East has been accompanied by extraordinarily low oil prices, and that shows no sign of changing. Yeah, one of the questions I actually had was finally Saudi Arabia […] the Saudi oil minister. In the FTO I read the other day that he said that it was nothing political and it was purely market forces. Having said that, do you think that they are doing so to undercut the US on shale oil? Well it’s interesting, there are two competing theories, aren’t there? There’s one that the
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Saudis are trying to undercut the US on shale oil and make shale oil less viable. There’s an alternative theory that Saudi Arabia and America may have a shared interest in a lower oil price because of the adverse effect
it has on Russia and Iran. We can speculate about the motives, but I think what is clear is that the oil price is very low and that has had a pronounced effect on prospects for Russian growth at a time when Russia is arguably seen as a greater threat to the West than at any time in 25 years, since the collapse of the Soviet Union. So whether by design or by accident, you could say that a low oil price is beneficial to the West both in terms of raising real incomes but also in terms of dampening growth prospects in Russia. What do you think the impact of quantitative easing has been on the UK and the US, and further to that, do you think that the world economy has to some extent become dependent on it? Well I think that quantitative easing has operated by keeping money – capital – cheap and plentiful, and by inflating the price of risk assets such as equities in high yielding bonds and houses. Those effects have served to bolster growth, and there’s clearly a debate about the extent to which they have affected growth. My own view is that quantitative easing has played a significant role in helping drive the recovery. I think America’s recovery
is probably sustainable without quantitative easing – that’s clearly the view of the Federal Reserve because it’s ended its programme of quantitative easing. The Bank of England is less confident and it hasn’t officially – it is no longer buying bonds but it hasn’t said it won’t at some stage in the future buy bonds. But I’m optimistic that growth can continue without quantitative easing, at least in economies where you have strong domestic demand and balance sheets, particularly in the financial sector, have been strengthened. I think there is greater uncertainty about whether quantitative easing will be able to be withdrawn in a sufficiently timely fashion to avoid inflation picking up, and that is perhaps the big risk in the global economy – or one of the big risks in the global economy further down the line. I almost saw it as coincidence perhaps that the Bank of Japan decided to start their program 48 hours […] the Fed’s October meeting being announced. Is that coincidence? I mean, Japan has a different problem with – you know; they’re really close to zero lower bounds They are, and they already have a massive program of quantitative easing and they have increased it by 70% with these latest measures, and clearly what they’re seeking to engineer is a devaluation of the yen, which they’ve had – the yen has fallen by about 30% in the last two years. They’ve had a dramatic effect on asset prices. I think the real question for Japan is whether there will then be the follow through in terms of stimulating risk appetite and driving corporate activity both in terms of hiring and investment, and those things have been seen in the United Kingdom and in the United States. Japan is economically appears to be more dysfunctional and has much longer running problems than the US and the UK, so we’ll have to see, but I think they are making a sensible bet on quantitative easing, and taking the view that, you know, if the medicine isn’t working then they should take more of it.