Nigel Lawson reckons Ben Bernanke made a mistake in cutting interest far too fast last year and earlier this.   In this morning’s Telegraph, Ambrose Evan-Pritchard, surely the most bearish commentator in the land of broadsheets, warned of a danger of a severe slowdown if the Bank of England overreacts to the latest inflation news.    But in the Independent, Stephen King called for that trio of central banks, The Fed, Bank of E and ECB, to up rates now.

Let’s run that past you again.  Bernanke was too dovish says Lawson, central banks must retain their dove feathers says Evan-Pritchard, and now is the time for the banks to don the clothes of hawks, says the Independent’s King.

Of the three arguments, the easiest to understand is the argument put forward by Lawson-boom Nigel.  Remember poor Nigel?  At one point he was hailed as Britain’s best ever chancellor.  He presided over a boom, which at the time was cited as proof Thatcher had turned Britain around. It was that time when the comedian Harry Enfield gave us his character “Loads-a-money”, but, though the signs were everywhere, Lawson didn’t spot them.   Later, but too late, he slammed on the brakes, the rate of interest rose from 7.3 to 14.9 per cent in the 18 months from May 1988 to October 1989, but he insisted there would be no recession as a result.  He was wrong, and 18 months later the Lawson boom went the way of the dodo.

These days, some people look back on that era and say the recession of the early 1990s was caused by our decision to join the ERM.   In fact, we joined the ERM in October 1990 – when the recession was already underway.    Others talk about the sky-high interest rates when we were in the ERM – of how rates hit 15 per cent on Black Wednesday, 16 September 1991.  In fact, rates were at that level for a matter of hours.   On the morning of Black Wednesday the rate of interest was 10 per cent.  It was upped twice that day, but by the Thursday, after we left, rates were down to 9 per cent. 

Sure, the ERM may have exacerbated the situation, but the real problem was mistakes made by Lawson when he first relaxed monetary policy and then over compensated.  

So it a tad ironic when Bloomberg quotes him this morning as saying: “The Bank of England has been very cautious and careful and it has been much closer to the views of the European Central Bank.  It has not gone conspicuously the way of the Fed, where I suspect that Mr. Bernanke’s now regretting it.”

Yet, in his Telegraph piece, Ambrose quoted Simon Ward, New Star’s chief economist as saying: “This slowdown is contributing to a dangerous liquidity squeeze on companies. We’re not in a recession yet, but it is approaching rapidly.  It would be disastrous if the Monetary Policy Committee tried to over-compensate for their errors in 2006 and 2007 by tightening too hard now.”

Meanwhile, Stephen King, who is the managing director of economics at HSBC, used his regular Independent column to ridicule this idea that inflation does not matter because it is down to external factors.

“If all countries regard higher commodity prices as an external shock how, precisely, should the shock be explained? Have Martians arrived to drive up demand for metals?” he asked.

He argues it is soaring demand from the developed world who have tried to hide from inflation through subsidies and through their deliberate policy of shadowing the dollar.  The answer, he wants to see the developed world take a concerted effort to revalue their currencies – so that is to say he wants to see a more expensive dollar, pound and euro relative to currencies in the developed world.

It is actually quite an interesting theory.  The conventional wisdom in recent years has been that currencies such as the yuan need to appreciate. But then in the past, economies suffering from inflation tended to see falling currencies – remember sterling in the late 1960s and 1970s.

The high price of oil and food is caused, goes the argument, because currencies such as the yuan are too expensive.  If the currency was to fall in value, oil and food would appear to be even more expensvie in China, it would no longer be viable to subsidise oil, and as a result demand in China would necessarily fall.

In short, the real problem with the global economy is not that rates are too high, rather it is that rates are too low, and in setting the agenda of creating higher rates, the West must take the lead.

So where does Mervyn King sit in this three-way argument?  Read the next article.