Understanding principles is, literally, the only way to avoid a repetition of past follies. At the time of the devastating credit crunch in 2008, the Queen famously asked a gathering of the great and good at the London School of Economics: “If this thing is so big, why did no one see it coming?” Ironically, the only people who have never come close to answering this question are those to whom it was addressed.

At the time they indulged in the game of guilt transfer: “At every stage someone was relying on someone else” said the leader of the group afterwards. “We all thought we were doing the right thing!” Economists now concede that the tightly held models, treated at the time as sacrosanct, were seriously flawed; yet their underlying theories are still with us. As Einstein is believed to have put it,”insanity means doing the same thing over and over again, and expecting a different result.”

Are today’s leaders any wiser? Are accountants and auditors now more effective as a bulwark against ruinous greed and corruption? Has today’s judiciary acquired the rigour to inflict meaningful penalties on the individuals running corporate scams, rather than on shareholders? Have central banks discovered a raison d’être beyond pursuing the figment of an economic recovery that their own actions render impossible?

Low taxation, free trade and sound money hold the key to economic recovery

And, most especially, governments. Do they now understand that policies of low taxation, free trade and sound money hold the key to economic recovery? Have they stopped trying, Canute-like, to contort economic cycles by destroying incentives to save? Have they at last abandoned the notion that they can spend their way into a demand-managed recovery? These are clues to the last economic crash – and the next one!

Seven years after that crash bank auditors are still wriggling under the spotlight of regulatory scrutiny into the uselessness of their earlier work. In 2008 the banks indulged in a spree of sub-prime mortgage lending, backed by repackaged bonds traded on the inter-bank market – literally a game of “pass-the-parcel” – until the music stopped.

Did auditors open the odd parcel to sniff the health of its contents? No. Their own rules conveniently allowed their bank clients to keep the junk on their balance sheets until the stench of widespread default could no longer be ignored. Contamination did the rest.

Why did no one tell Her Majesty that all of this was utterly predictable? That no one saw it coming only because no one looked?

Headless chicken syndrome

Interest rates gave a modest yet commercial return to savers who preferred liquidity to speculative investment. Not now. Central banks everywhere have been infected by the “headless chicken” malaise of follow-my-leader and praying that he knows what he’s doing! Central banks’ rationale for the dramatic descent into unchartered waters of zero and sub-zero interest rates is that “non-conventional” tools are needed to stimulate the economy – even buying mortgage-backed securities with quantitatively eased fiat money. “Whatever it takes” is the global mantra.

Yet just as the Japanese announce their brilliant ploy of negative interest rates, their “Abenomics” mastermind is mired in corruption allegations and forced to resign. You couldn’t make it up! Central bankers dream about a steady 2 per cent inflation level as if it were in their power to achieve it, while the prices of key commodities do their own thing in the opposite direction.

With all this money sloshing about why is there no inflation?

With all this money sloshing about why is there no inflation?What Treasury economists don’t see is that prices have indeed gone up – but not the prices of anything in their statisticians’ consumer index: rather real estate, luxury goods and all those assets in the grasp of the first receivers of the new money, coupled with an unsustainable mountain of emerging-market sovereign, corporate and housing debt, backed by self-certified “liar loans” – all just waiting to collapse at the first hint of interest-rate normalisation.

The truth is that the Emperor really does have no clothes. We can only wonder how they will answer the Queen next time!