Dispatches from the G-20 Summit

The President and the Prime Minister have been scuppered by a 'King.'

Last week, the governor of the Bank of England, Mervyn King, an unelected and unaccountable public servant, intervened in the global political process set in train by the G20.

By doing so, he scuppered plans laid by Prime Minister Gordon Brown and President Obama to reflate the global economy. They planned to do this by ensuring that government spending filled the vacuum created by the collapse of private sector spending -- and to protect and create jobs.

Without this stimulus we can be certain that the global economy will continue to contract. The ILO predicts that job losses in 2009 will rise to 52 million, 38 million more than in 2008.

King is supported in his views by the European Central Bank, by Chancellor Angela Merkel and by President Nicholas Sarkozy. However, his intervention has been the most damaging to Anglo-American efforts to reflate the global economy.

King and many of his monetarist 'fellow travellers' are against injecting further liquidity -- money to you and me -- into the economy through stimulus.

The reason? That it will result in inflation.

Mervyn King has devoted his term of office as Bank of England governor in focusing narrowly on the issue of wage and consumer price inflation. At the same time he turned a blind eye to the role that 'easy money' played in fueling asset price inflation.

King warned of inflation as recently as last spring when temporarily a wall of speculative money inflated the price of commodities. His warnings led the British commentariat to spook themselves with 'frightmares' about the "spectre of inflation". The charge was led by the BBC's economics team with Hugh Pym warning in his News At 10 report (17th June 2008) that inflation was "haunting the economy...." . Michael Crick of the BBC's Newsnight piled on the horror that night, by flashing images of the strikes and inflation that brought down Callaghan's government during 1978's infamous "Winter of Discontent."

Predictably, the spectre of Germany's 'hyperinflation' of the 1930s was presented as an example of what might be in store if wages, salaries and consumer price inflation were not firmly held down.

Yet we know full well that today, less than a year later, the real threat is deflation.

The underlying collateral for both credit and prices -- property values -- continues to nosedive, driving the forces of deflation. Today the Standard and Poor's Case-Schiller Home Price Index was released, showing a record drop in home prices of 19% in the last year, with no turnaround in sight.

As credit dries up and crunches around the world, consumption is squeezed, exports collapse, firms are bankrupted and unemployment rises on a frightening scale.

These job losses that Brown and Obama were proposing to address through coordinated stimulus will in turn exacerbate the crisis of the finance sector. The unemployed will continue to default on mortgages and debts, will be unable to consume, and the result will be more corporate bankruptcies and bank failures. This will accelerate the downward spiral of falling wages and falling prices.

The consequences, therefore, of Governor Mervyn King's intervention will be played out for years to come -- in the destruction of banks, businesses, jobs and human lives.

Very few of us have lived through a debt-deflationary crisis, and none of us have lived through one so tightly synchronised by globalisation. It is a truly frightening prospect.

When the history books are written, it will be the governor of the Bank of England supported by the European Central Bank whose actions subverted the efforts of two democratically elected politicians at this weeks' G20 Summit.