Honest money

 

               On Thursday I will be leading a one day debate in the Commons on the UK economy and economic growth. This is possible owing to the excellent reform that gives a Backbench Committee the right to allocate debates for one day a week. I asked for this wide ranging debate on what is needed to encourage decent growth and was granted it.

              In the run up to the debate I will highlight some of the issues I expect to arise and some which I will be tackling in my opening speech.

              The first requirement should be honest money. For twenty five years now I have found myself in dispute with the ill judged stance of the Bank of England, which has lurched from boom to bust and from boom to bust again. In the late 1980s I wrote and argued against joining the Exchange Rate Mechanism,  saying that joining would lead to boom or bust. We subsequently joined, and had both boom and bust as a result. It did huge damage to the UK economy, and plunged  the Conservative party into a 13 year political wilderness. People rightly objected to the high interest rates and the recession which ERM membership brought about.

               In the middle 200s I found myself arguing with the Conservative front bench about the wisdom of backing the so called independent Bank of England. I thought the MPC was likely to lurch from boom to bust. They did so in a way surpassing even my wildest fears, creating the conditions for the most extreme credit bubble I have ever seen followed by the worst financial crisis since 1929-32.

               Today I find myself arguing against more quantitative easing. The direct creation of money is an extreme measure for extreme conditions. If prices are falling or are in danger of falling, if there is a lot of unused capacity and if the money supply is falling there can be a case for money creation once interest rates have been depressed to near zero.

               The current situation is very different. RPI inflation is 4.6% and has been around 5% for some time. CPI inflation has been above target for most of the last five years and remains so. Much manaufacturing capacity is now back in use, following a violent shake out in 2008-9. There is evidence of inflationary increases in input costs,with many commodity prices and oil leaping up from the lows of 2008-9. Money growth has resumed.

               The public spending figures show how important control of costs, wages and prices are. In an era of low cash increases in total spending each year it is even more important to keep down inflationary increases to maximise what the money can buy. As we import around one third of what we buy keeping the pound up is crucial to avoid more imported inflation.

               The first task of the government must be to go forward to honest money. The MPC needs the Chancellor’s permission to print more. He should make it clear his permission will not be forthcoming in this climate. The UK needs to be weaned off inflationary shots of extra money.

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48 Comments

  1. Stuart Fairney
    Posted November 7, 2010 at 6:53 am | Permalink

    Oh dear, falling prices are good for consumers, not bad. At some point consumers again regard goods as cheap and start buying them again and this is the reasonable and natural end of a recession. The doom-mongering from Keynesians that we will get into an ever worse deflationary cycle is simply not born out by the entire experience of non-fiat currencies. It is however a handy excuse trotted out by those in government who rather like the idea of a legalised counterfeit/theft operation such as a fiat currency.

    • electro-kevin
      Posted November 7, 2010 at 7:26 pm | Permalink

      Inflation is good for the governments of western economies in decline.

      With the outsourcing of industries there is little to prop up the standard of living but debt. The housing market is used to back debt – immigration (to the point of overcrowding) serves the dual function of fueling the housing market whilst out-breeding the naturally conservative population which has proven to be the bain of the broadly left-wing British Parliament.

      What diminishes debt ? Inflation does. Politicians use it to put off the day of reckonning.

      The normally ebullient Chris Evans was right this week when he said that Britain was on the verge of crisis.

  2. lifelogic
    Posted November 7, 2010 at 7:58 am | Permalink

    John Major, in joining the ERM, under pressure from the EU and the usual wets (still much in evidence) certainly destroyed the Tory party for at least 13 years (even now it is not in real power and show little signs of being Tory).

    I have yet to hear him, or any of the other wets, apologise for this entirely predicable and avoidable disaster.

    • John C
      Posted November 7, 2010 at 12:09 pm | Permalink

      I remember Andrew Neil once recounting a passing meeting with John Major shortly after the ERM debacle. He was surprised at the lack of contrition by Major who basically shrugged it off and said something like “there are more than one way to skin a cat” .

      I remember this as Andrew Neil was furious at John Major’s attitude after one of the biggest economic blunders this country has ever faced.

    • Richard1
      Posted November 7, 2010 at 3:44 pm | Permalink

      Prime Minister at the time was Margaret Thatcher. It was not only the wets who supported the ERM.

      • lifelogic
        Posted November 7, 2010 at 9:53 pm | Permalink

        True but, if I recall correctly, she was pushed into it by Major as Chancellor and the rest of the wets.

        She was however daft enough to appoint him I suppose.

  3. A.Sedgwick
    Posted November 7, 2010 at 8:38 am | Permalink

    Good stuff – you are clearly too smart for the Coalition.

  4. Brian Tomkinson
    Posted November 7, 2010 at 8:57 am | Permalink

    Good to see that you and others are getting an opportunity to express your views and opinions. Will anyone from the government be listening and prepared to take action as a consequence? I have my doubts but hope I am wrong.

  5. Nick
    Posted November 7, 2010 at 9:04 am | Permalink

    For twenty five years now I have found myself in dispute with the ill judged stance of the Bank of England, which has lurched from boom to bust and from boom to bust again.

    Identical then to politicians like yourself in the period before.

  6. Andrew Gately
    Posted November 7, 2010 at 9:21 am | Permalink

    I think you are right regarding the MPC which has somehow managed to get it wrong at every turn but has emerged from the crisis with it’s reputation enhanced.

    Regarding quantative easing, so far as I can see it only seems to fund govt. borrowing and does nothing to resolve the liquidity crisis facing the wider economy.

    I have been of the opinion all along that the role of the BOE was to lend to banks that are faced with having to repay the monies that they have borrowed short to lend long.

    The moral hazard and incentive for the banks to get there house in order could have been obtained by simply charging a higher rate of interest on these loans.

    If the Bank of England had done this we would have had no nationalisations, no part nationalisations and the banks could have reduced their balance sheets at a sensible rate over a number of years.

    Unfortunately the rather silly taxpayer monies got in the way and instead we got a raft of rather silly and unnecessary solutions to what was quite a easy problem to resolve.

  7. Nick
    Posted November 7, 2010 at 9:48 am | Permalink

    Just listening to IDS lying on TV. He’s blaming Blair for the level of money the government spends on the EU.

    However, there is a convention that no government is bound by the spending promises of a prior government.

    So John, are you going to make the case that as we have a new government we can throw away Blair and Brown’s promises to the EU and get the EU spending down in line with all spending in the UK?

    Thought not. All that money to MPs and nothing back.

  8. Span Ows
    Posted November 7, 2010 at 9:49 am | Permalink

    Is a day debate going to be enough? You always make complete sense John (although at the time I thought the BoE Independence was a good thing it has been shown to be a disaster) and you’ll have support and opposition from all parties! Funny old world!

  9. Mike Stallard
    Posted November 7, 2010 at 10:08 am | Permalink

    PLEASE keep banging on and on about this. The government has devalued MY money. Here in Australia, the pound which a couple of years ago was around 2.5 Australian dollars is now just over 1.2 dollars and we are really feeling the pinch. Where has all the money gone? Three guesses.
    Singapore and Australia have dollars which are at par with the US dollar.
    By cheating people, issuing paper money, we are building up very dangerous precedents. Inflation is like standing on the side of a steep precipice – you suddenly go over the edge.
    We are building up real problems for our children here and we must stop now before it is too late.
    So however unpopular it makes you, do keep defending us.

  10. electro-kevin
    Posted November 7, 2010 at 10:12 am | Permalink

    Things have been going wrong for an awfully long while now.

    My earnings have increased by 30% over the last ten years and yet it has been a miserable period of domestic cut-backs because I’m struggling to keep up with rising costs. There have only been two foreign holidays in that period and both were subsidised by staying with parents.

    The only way in which maintaining a standard of living of living got easier for people was by using cheap credit. In truth Britain has been in a decline at a rate far steeper than figures reveal and I believe that there is going to be a big shake out when we come off emergency interest rates.

    It is not cut-backs or tax rises which are the risk. It’s inflation, the levels of which Labour lied about and hid during their term in office.

  11. Nicola Clubb
    Posted November 7, 2010 at 10:17 am | Permalink

    I wish i was in a position to actually listen to this debate but I will be at work and likely not to be able to. One problem with the ecomony at the moment is the lack of jobs and with what the papers were reporting today about the work shy being made to do 30 hours of work experience (which i might add is a good idea) but where are they going to be working. Picking up litter and similar jobs is not what i would call work, that is slave labour, give the companies the chance to create jobs and then it would work. The company I work for deal with the long term unemployed trying to get them into work placements, as well as other tasks all connected to getting them paid jobs, but a lot of the companies are getting snowed under with the various schemes getting the unemployed back into work.

    • norman
      Posted November 7, 2010 at 3:04 pm | Permalink

      I’ll be at work too, as I suspect most of us will be. It would be nice if we could get lengthy excerpts from the debate hosted here, although I’m not sure of the copyright position.

  12. waramess
    Posted November 7, 2010 at 10:20 am | Permalink

    As Harold Wilson discoovered business does not respond to what might be temporary measures. I remember him showing great puzzlement at businesses not responding to government measures designed to encourage investment.

    Had this country not discovered North Sea oil our decline by now would have been dramatic and unless the Government understands there is little they can do to save the situation then we are doomed.

    We suffer too much Government, too much tax, too much interferance and the only way out of this hole is to start providing less. Sound money will follow

  13. lifelogic
    Posted November 7, 2010 at 10:22 am | Permalink

    Honest money would clearly be most helpful. There is currently virtually no incentive to save or invest in the UK what so ever. With negative real interest rates and up to 50% tax on the so called “return” to boot.

    Then again there is a need for wage and pension reductions in the state sector which perhaps (given the employment laws) can only be achieved by giving no wage increases and some inflation.

    Perhaps one day the UK could follow Switzerland fully and get out of the EU, have sensible tax rates, sound money and control of our own borders and destiny!

  14. Steve Cox
    Posted November 7, 2010 at 11:18 am | Permalink

    I live in Thailand, where UK pensioners don’t even qualify for the annual increases, so I’m in agreement with Mr. Stallard’s post above. The huge devaluation of Sterling may be nice for British exporters, but for just about everyone else it’s a disaster. And many of those exporters have to make their products from imported materials which are now far more expensive, so it’s hardly surprising that the cheap pound hasn’t led to a massive rebound in exports. Devaluation was always a 20th century solution to a 21st century problem, so now that it’s failed let’s try getting back to normality.

    I fully, 100% support your stance on the QE funny money. Weimar Germany showed that massively increasing the money supply might not have immediate bad consequences, but sooner or later it’s a rabid dog that will tear you apart. I was very disappointed to hear George Osborne sounding bullish on further QE next year just after the BoE decided not to print any more e-pounds, and every economic and financial commentator not in the lunatic left-wing category (one that is over-fill, to be sure, no wonder that economics is still the dismal science) were already giving a big thumbs down to Helicopter Ben’s QE2. Perhaps Osborne was simply ‘doing a King’ and talking up QE2 in the UK so as to talk down the pound, in which case see paragraph 1 above.

    We need sound money, John, and positive real interest rates, otherwise why is anybody going to ever save for their future? The BoE and its ‘independent’ MPC needs a thorough shake-up so that they actually do the job they are tasked with of controlling inflation, which has been far too high for far too long.

  15. alan jutson
    Posted November 7, 2010 at 12:22 pm | Permalink

    Ah “Sound Money”.

    Just like Defence of the Country it should be at the cornerstone of every Government Policy. To follow any other policy which devalues a Currency is simply dishonest.

    For too long Governments of all colours have manipulated polices to suit their own ends, and encouraged growth on credit, and allowed inflation to reduce such debt.

    Yes we need to encourage people to save ansd live within their means, and one of the simple methods is to make all savings interest “TAX FREE”.

    When people are confident that their savings will be viable (with regard to purchasing power) and stable for either a rainy day, for long term planning or retirement, they then have some confidence to spend the rest of their money on a whole range of products and services which will help the economy, future jobs, profitability of businesses etc.

    Look forward to your debate and wish you well.

    I am sure your clear and concise delivery will make for interesting comments, let us hope the attendance in the House reflects the seriousness of the subject.

  16. Norman Dee
    Posted November 7, 2010 at 12:24 pm | Permalink

    We are overburdened with Europe and over immigration of non productive people, both of which need attention more than quickly. Getting out Europe is easier to deal with than the millions of idle hands, and it will release the money needed to start the work incentive programmes. I am interested in what is going to happen when all these immigrants who have never worked are asked to do community service(etc)

  17. Stephen MacLean
    Posted November 7, 2010 at 1:49 pm | Permalink

    From the North American perspective, where the Great Depression covered the Thirties due to inept Keynesian policies, it’s very intriguing to read the British explain the self-same period as ‘the worst financial crisis since 1929-32.’

  18. Neil Craig
    Posted November 7, 2010 at 2:10 pm | Permalink

    I am very glad to see the subject of economic growth being squarely addressed in Parliament. I was also pleased to see Mr Cameron’s speech recently promising a “forensic, relentles pursuit of growth”. If that is kept to I see no reason why we cannot achieve growth levels surpassing China’s 10% (though surpassing the 20% China’s best province, Guandong has managed night be difficult).

    May I reccommend this forensic statistical analysis of economies worldwide & what has worked. http://www.slideshare.net/indicusanalytics/habits-of-highly-effective-countries-presentation Their conclusion is that economic freedom is the “necessary & sufficient condition”. In this light I regret to see that Nick Clegg has decided that deregulation has been too much for him & hope Mr Cameron will pass the task to some willing & more capable politician – if he is serious about economic freedom he certainly must.

    Beyond that sufficient reliable quantities of inexpensive power seems to be a major driver of growth – it is unfortunate that, for years, our politicians have been doing their best to promote unreliable & expensive windmillery. It should be noted that nuclear power can be 1/10th of the cost of wind power & were we to simply allow the immediate building of as much such plant as the free market wants we would certainly attract enough investment ro get immediately out of recession..

    Beyond that looking at the record of Ireland, which maintained 20 years of 7% growth pretty much just by cutting corporation tax & allowing housebuilders freedom to build should not be ignored, as it so often has been in the Westminster village. Even in recession Ireland’s example of bringing spending under control quickly is admirable & though they have gone into deeper recession than us it is less deep than the difference in proprtions of GNP each are borrowing.

    If government really is going to be “relentless” in promoting growth it will be achieved. It is noticeable that Labour’s current position seems to be that they want growth more than ending the deficit (an arguable position I would tend to support) & that the way they would achieve growth is by contiuing with high borrowing & spending it on parasitic government “jobs” (a position nobody who is economically literate or indeed doesn’t believe in perpertual motion machines could honestly support).

    • Mark
      Posted November 9, 2010 at 12:55 am | Permalink

      You should read Prof Morgan Kelly’s diagnosis of the Irish situation:

      http://www.irishtimes.com/newspaper/opinion/2010/1108/1224282865400.html

      I don’t think Irish eyes are smiling. However, a “kindness to a stranger” could be to offer them some occupants for their empty houses which will be going for (literally) knock-down prices. Of course, they might regard that as a hospital pass and turn a cauliflower ear our way if they can’t work out how to make such an immigration flow into a powerhouse of the scrum called the EU economy.

  19. Frank Salmon
    Posted November 7, 2010 at 3:08 pm | Permalink

    John
    You are wrong on keeping the pound high. We need a low value pound to reflect our lack of exports over imports. A high pound would widen the trade gap. Also, we need to know we are poorer than we thought we were. Higher prices would mean a one off increase in costs, not inflation. We should be at least 15% poorer than we were in 2008.

  20. GJ Wyatt
    Posted November 7, 2010 at 3:38 pm | Permalink

    “Money growth has resumed” — not broad money (M4). The Bank of England’s latest data (20th October) – show it was still falling month-on-month in September. Since this reflects the demand for money which in turn reflects private expenditure, it is no wonder the Bank is concerned about the downside. Meanwhile QE has artificially pushed up financial asset prices and depressed the pound. So indeed there is a chance of stoking up inflation. The Bank has a tightrope to walk.

  21. Richard Hobbs
    Posted November 7, 2010 at 4:45 pm | Permalink

    “Funny Money”

    When I was much younger I was rather frightened by you and you views, John. Nowadays I see things much differently and, for quite awhile, have been an avid (though passive) reader of your Blog. I find that I agree with most of what you say!

    My wife and I are British living in Canada. We took early retirement to come out here and look after a sickly relative (war hero) who has since died. Like many people we have been hard hit by the recession. On advice that there was nothing as safe as the Banks much of our savings were in Bank shares – Northern Rock & Royal Bank of Scotland – need I say more……… Our income is reliant upon our British pensions. As in Australia (Mike Stallard, Australia, above), so in Canada. The £ has gone down from a high of around $2.60 Canadian to each £ and now stands at $1.61; but at least this is some improvement over $1.47 to which it had dropped. Simply because of where we live, our UK State pensions have been frozen at the rate when they were first issued (see Steve Cox, Thailand, above) so we have had a double whammy there – a freeze and drop in value!!. We lose all round and are finding life very tough. No chance of holidays for us (see electo-kevin above). We have’nt been out of our area for a long, long time.

    OK, I hear you say, come home where a £ is worth a £. And where do we go. We do’nt expect the State to help us out, thank you very much, but the house we sold when we left would cost 300% more than we got for it; in rural Canada nothing like that has happened. Our choice could be to rent, but we have standards and have you looked at rental costs! We are caught.

    So, your points about honest money hit quite a chord with us. The initial answer for our poor old country has got to be to get our money right first. Many things can follow on from that. Perhaps we can then give the lie to the many ‘Brit Bashers’ there seem to be around here (most of them Brits themselves) who keep on tellimg us that Britain has gone to the dogs and there is no saving it!

    Thank goodness we stayed out of the Euro and have people like you around. Good luck on Thursday.

  22. Richard Hobbs
    Posted November 7, 2010 at 4:57 pm | Permalink

    “Funny Money”

    When I was much younger I was rather frightened by you and you views, John. Nowadays I see things much differently and, for quite awhile, have been an avid (though passive) reader of your Blog. I find that I agree with most of what you say!

    My wife and I are British living in Canada. We took early retirement to come out here and look after a sickly relative (war hero) who has since died. Like many people we have been hard hit by the recession. On advice that there was nothing as safe as the Banks much of our savings were in Bank shares – Northern Rock & Royal Bank of Scotland – need I say more……… Our income is reliant upon our British pensions. As in Australia (Mike Stallard, Australia, above), so in Canada. The £ has gone down from a high of around $2.60 Canadian to each £ and now stands at $1.61; but at least this is some improvement over $1.47 to which it had dropped. Simply because of where we live, our UK State pensions have been frozen at the rate when they were first issued (see Steve Cox, Thailand, above) so we have had a double whammy there – a freeze and drop in value!!. We lose all round and are finding life very tough. No chance of holidays for us (see electo-kevin above). We have’nt been out of our area for a long, long time.

    OK, I hear you say, come home where a £ is worth a £. And where do we go. We do’nt expect the State to help us out, thank you very much, but the house we sold when we left would cost 300% more than we got for it; in rural Canada nothing like that has happened. Our choice could be to rent, but we have standards and have you looked at rental costs! We are caught.

    So, your points about honest money hit quite a chord with us. The initial answer for our poor old country has got to be to get our money right first. Many things can follow on from that. Perhaps we can then give the lie to the many ‘Brit Bashers’ there seem to be around here (most of them Brits themselves) who keep on telling us that Britain has gone to the dogs and there is no saving it!

    Thank goodness we stayed out of the Euro and have people like you around. Good luck on Thursday.

  23. Bazman
    Posted November 7, 2010 at 5:05 pm | Permalink

    The wages for factory workers and tradesmen are about the same or less than in the mid 90’s. As a rule of thumb the price of everything has doubled and house prices have trebled. The saving on wages has been had. I for one will be looking to working in a supermarket instead of working in my trade. Deli counter or construction site? It’s a no brainer. Get an East European to do the work. I’m not that desperate.

    • alan jutson
      Posted November 7, 2010 at 7:09 pm | Permalink

      Bazman

      Wages for Tradesmen about the same as the Mid 90’s.

      You are correct, absolutely no incentive anymore to learn a skilled trade, and fewer and fewer properly trained (Apprenticeship) trademen still around to pass on the skills learned over generations.

      Customers are their own worst enemy in many cases, saying they want a quality job, but not wanting to pay for it.

      Many skilled people left the industry in the late 1990’s, many more in the last two years.

      Little reward now for being self employed or running a small business.

  24. JimF
    Posted November 7, 2010 at 5:18 pm | Permalink

    I think you need to point out the ways in which, even since being elected, this Coalition government has been heading at various angles up to 180 degrees away from sound money and a sound economy.
    -whilst the IDS proposals are admirable, they probably don’t go far enough in removing the barriers to people working (£400 a week is still a lot of money to have to earn to beat housing benefit, just to have a roof over your head)
    -letting inflation do the dirty work of getting the debt under control ENCOURAGES debt, not saving, both privately and state-wise. So they are blowing up the balloon they need to deflate
    -inflation always used to be taken account of in setting interest rates, and still should be under the rules. Now it seems to be that house prices and unemployment drive interest rate policy.
    -taxation policy is all at odds with driving the economy. Why penalise those who would do overtime by taking away their child benefit when they reach that magic figure of £44000? Why continue to hobble companies who want to invest with 28pc corporation tax rates and reduce the effective tax allowances for small companies investing in equipment? Why continue to spend shedloads of cash via the Roy Spendloves and yet hobble working people and Companies in this way? There is plenty of room to care for the young, sick and disabled whilst focussing laser-wise EVERY OTHER PENNY of tax on growth and success.
    -tertiary education policy is swinging against growth. Why hobble first-class minds, whatever their ancestral financial circumstances, with frankly unquantifiable debts to pay if they educate themselves here in the UK? Why do that, risking the long term skill base, to pay maintenance and pensions for your Vicky Pollards and Fred Goodwins? Why frighten young first-class minds away???? We should be offering FREE tertiary education to anybody bright enough make good use of it for the Country, (as used to happen) and only charge them if they DON’T pay tax here later, not if they do (and there are means and ways).
    To summarise, your Government is still driving a socialised machine under cover of a Libdem flag, living for the day, and I look forward to hearing your attempts to beat some sense into them on these issues.

  25. Lindsay McDougall
    Posted November 7, 2010 at 5:46 pm | Permalink

    The problem is that the Govenor and the MPC exceeded their remit and were actively encouraged to do so by Gordon Brown. Their remit is inflation targetting and nothing else. They added recession avoidance, which led to 0.5% base rate and QE. When people exceed their authority in this manner, the correct course of action is to sack them.

    I like your line of arguement and would like confirmation that honest money means 0% inflation.

  26. Richard
    Posted November 7, 2010 at 7:00 pm | Permalink

    Growth is the ambition and the requirement, but Government listens to big business far too much and they do not address the needs of SME’s or realise their importance in our economy.
    Whilst SME’s want reductions in regulation and an increase in open markets and competition big business do not as it helps preserve their power.
    Seen any new small banks, car manufacturers, supermarkets or insurance companies start up recently for example?
    If every SME took on just a few new staff then the Governments job creation problem would be solved.
    Just provide incentives and watch the small company private sector create the growth you need.

  27. Martin
    Posted November 7, 2010 at 7:16 pm | Permalink

    I think you are highlighting bubbles as a risk to the economy. The question now is what to do about these bubbles. Should the Bank of England or whoever just start issuing economic health warnings or should some active measures be taken?

    As ever I make my customary suggestion for free growth – dump the present Nimby planning rules. The extra Housing in the South East (and elsewhere) might help Mr Duncan-Smith with his housing benefit problems by increasing supply.

  28. Sally C.
    Posted November 7, 2010 at 9:01 pm | Permalink

    Good luck with the debate, JR. I do hope George Osborne is inclined to your point of view.

  29. vincent Shand
    Posted November 8, 2010 at 2:17 am | Permalink

    John redwood posted on his website about a forthcoming debate in the House of Connons on the subject
    This analysis is well put. Might I relate it to the Hayekian context? The principles lessons we can learn from the Austrian Sage are not in the intricacies of his capital theory – which is out of date. Nor in a return to gold – which he did not support in later years. Rather it is three interconnected aspects.
    1) Many of the actions that governments (and central banks) make have implications that are beyond our full, collective, knowledge, even retrospectively. I would draw this out to a paradox. The areas where we need the most vital decisions are the areas where we have the least knowledge. It is easy to plan a budget on 2% growth for next year, when that has been the pattern for a number of years. It is where the economy entered unknown territory that accurate decisions are vital, but where you have no pattern on which to ascertain the correct path.
    2) The capitalist system creates imbalances that will be self-correcting once the imbalance is recognised. Trying to eliminate the correction process will only serve to delay and amplify the later correction process. An example was lowering interest rates post the dot-com bubble burst and to a lesser extent post 9/11.
    3) Planners suffer from a belief that whatever they do is correct. That is correct in place, timing and extent. Any failure must be a conspiracy of wreckers or due a failure of detail and information. Currently we have the bankers accused of being the wreckers, and the solution of ever greater and more stringent controls.
    To justify QE requires an ability to assess the balance of risks. That is the potential benefits of propping up a failing economy, against the long-term risks of inflation; of delaying the inevitable adjustment of house-prices; of the wrecking of future pensions by lower real returns; and of delaying the necessary reductions in the government deficit. To put it bluntly, the conditions where the balance of risks are likely to have a net effectiveness, are the conditions where QE is least needed. In a crisis, where it is used to save the economy from catastrophic collapse, is where the risks cannot be assessed, but if they could be assessed, they may be highly likely to only delay & exacerbate the inevitable adjustment process.
    Part of the issue here is that both the Board of the Bank and the Government are ill-qualified to make the proper decisions by the very abilities that got them into their current positions. You do not achieve political power or promotion by saying things cannot be done, or that we should assess the risks. Rather it is those who seize the moment, make things happen, and make a visible impression that get advancement or election. Advancing careers can be curtailed by saying “sorry, but got this a bit wrong old chap. Better luck next time what?”

  30. Sabine K McNeill
    Posted November 8, 2010 at 8:12 am | Permalink

    Honest Money! Hurray!!! See Honest Money – A Challenge to Banking.

    As long as central banks expect us to live with dishonest moneywithout enough people challenging it, we can only expect what we’ve got: a steady rise of inequality with all its social consequences.

    With best wishes for more and more power to your questioning elbows,
    Sabine
    <

  31. APL
    Posted November 8, 2010 at 8:23 am | Permalink

    JR: “The direct creation of money is an extreme measure for extreme conditions.”

    Extreme conditions manufactured by the Banking cartel and their cheap, tame politicians.

    Something needs to be done to address that axis before anything else can be resolved.

    JR: ” If prices are falling or are in danger of falling, ”

    Suddenly you are complaining about prices falling, did you complain about the fact that the PC you bought last month was cheaper provided more performance than the one you bought two years previously? N0, falling prices are not bad unless they are falling into the maw of rising commodity prices caused by QE, printing, government debasement of the currency.

    falling prices and rising input costs will destroy what is left of the manufacturing base. This scenario has been engineered by the politicians and Banks

    JR: “if there is a lot of unused capacity and if the money supply is falling there can be a case for money creation once interest rates have been depressed to near zero.”

    Interest rates depressed to zero was never about helping the population, it was always about the Political Banking complex covering its backside, trying to pull the banks irons out of the fire.

    What is has done is destroy the living standards of the elderly who had been cautious or thrifty all their lives, it helped the banks who can obtain money at 1% from the Bank of England, and sell it to the general public for 9 or 10%.

    Yes, wee need banks for a healthy economy. We don’t need THESE banks nor should we or our children be forced to pay for the behaviour of the british or American banks that led us to this place.

    By the way, we shouldn’t be bailing out the property speculators either, I have nothing against speculation with your own money, but if you are speculating you should not have a government backstop.

  32. EJT
    Posted November 8, 2010 at 9:48 am | Permalink

    Yes, we need sound money. Yes, as others have stated, we’re in a worse state than we think and we won’t get out of it without recreating a viable environment for industry.

    But. Why is this even a matter of debate, when we desperately need action ?

    I suggest that it’s a function of the type of people that we have put into parliament I would have happily voted for Mr. Redwood, but I am not in his constituency. One of the 3 reasons that I did not vote conservative was that the candidate here had zero life experience – business school and a couple of years public sector work.

  33. tomsmith
    Posted November 8, 2010 at 10:46 am | Permalink

    Honest money is not in the current interest of big government John. Inflation is part of the plan.

  34. lola
    Posted November 8, 2010 at 1:47 pm | Permalink

    “The first task of the government must be to go forward to honest money. The MPC needs the Chancellor’s permission to print more. He should make it clear his permission will not be forthcoming in this climate. The UK needs to be weaned off inflationary shots of extra money.” Fat chance.

  35. Javelin
    Posted November 8, 2010 at 2:55 pm | Permalink

    I’ve argued on this site before that it’s coming out of recession where the real dangers lie – going into a recession is easy. Coming out and managing higher inflation and interest when parts of the economy are weak is the real challenge.
    Yet here we are again. Inflation is lurking, house price falls have lagged the economy because politicians and home owners can’t bear to reduce their price. We now await interest rate rises and debt defaults – it’s the ERM all over again. The only difference between now and then is that it’s not just the ERM But the global economy that is involved. Today mortgages are used as security for debts – not just government bonds as it was in 1992. This has created new geared feed backloops in the system.

    When interest rates go up then the values of houses will fall – banks will lower their price via mortgage backed securities – and raise mortgage rates. Mortgages are the new gold and part of the global financial system. Having looked after credit derivatives IT at the worlds largest back for 3 years and now operational risk it’s my job to forsee these things.

  36. FaustiesBlog
    Posted November 8, 2010 at 5:46 pm | Permalink

    I hope you will be advocating a return to asset-backed money, JR.

    Why, if the government does have to increase the money supply, does it choose to borrow it, at interest, from a bank? If the government created its own money (subject to parliamentary agreement and not executive fiat), it would not have debt servicing costs which are currently crippling government.

    You will recall, that prior to 1913, the US government, overseen by Congress, created and managed the country’s money supply. During the period in which the happy state of affairs existed, the US grew, the people became richer and better educated, business grew and as a result, the US embarked on a course to become the most powerful nation on earth.

    Can you advise as to what time your debate will begin, please?

    Reply: Around 12.15

  37. Gary
    Posted November 9, 2010 at 9:43 am | Permalink

    fiat counterfeiting and debt pyramiding almost guarantee war and foreign plunder. In the first case inflation is absolutely neccessary to wage war and pay off opponents, and secondly debt pyramiding requires a constant stream of new borrowers to create the new money to pay the debt on old money, as well as to attempt to garner new assets to offset old “assets” that have been devalued by asset collapsing bubbles. Dishonest money is a crime against the people of the country and the world.

  38. Gary
    Posted November 9, 2010 at 10:57 am | Permalink

    Many advocate that the govt should issue debt free money. It would be better than what we have, but not much better. The Economic Caculation problem, the axiom of Austrian Economics says that outside of the demand and supply of a free market it is IMPOSSIBLE to set prices ie allocate resources effectively.

    If it were possible then a computer program would already have been devised to predict the future. It has not and will never be. See LTCM’s collapse for details.

  39. Conrad Jones
    Posted November 10, 2010 at 11:59 am | Permalink

    Mr Redwood,

    I totally agree.

    “The MPC needs the Chancellor’s permission to print more. He should make it clear his permission will not be forthcoming in this climate.”

    We need to go one stage further – take money creation powers out of the hands of the Bank of England.

    Interest Rates should be set by market conditions and not set by one monopolised entity like the BoE.

    “Honest” money would either be UK Treasury Created Money or going back to the Gold Standard – or both.

  40. Conrad Jones
    Posted November 10, 2010 at 12:07 pm | Permalink

    Can we also have an honest debate concerning the inner workings of the Bank of England?

    This relates to the Freedom of Infomation Act Exemptions for the
    “Bank of England Nominees Ltd”.

    A Nominee Company is usually used by Share Holders to maintain their anonymity.

    As the Bank of England is Nationalised – the operations of the Central Bank should be transparent.

    The United States have a similar problem which is why Congressmen Ron Paul is pushing for H.R. 1207:

    “To amend title 31, United States Code, to reform the manner in which the Board of Governors of the Federal Reserve System is audited by the Comptroller General of the United States and the manner in which such audits are reported, and for other purposes.”

  41. Chris Skeet
    Posted February 14, 2012 at 7:14 pm | Permalink

    QE does not involve printing money.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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