Bloggers have asked me what do I think of printing money (quantitative easing).
It can be necessary when an economy is in slump and there is no danger of a collapse of the currency or inflationary tendencies from doing it. It is dangerous if there are inflationary tendencies, and if the currency is vulnerable.
The recent views of the Monetary Policy Committee continue to alarm me. They should remember their job is to keep price increases down to 2% on the CPI. They have singularly failed to do that, with the CPI still showing 3% despite the general slump in activity. We are now in Slumpflation thanks to the government and them.
Monetary easing could be part of the answer to our current decline in activity. It needs to be accompanied by spending and borrowing less in the public sector. This is easy to do – all they need to do is spend a lot less on subsidies to wayward banks for starters. The future course of sterling matters a lot. Any further decline in the pound would be inflationary. Sterling now responds to news on RBS and the other nationalised or semi nationalised banks, because overseas holders can see the dangers of the UK state taking on too many debts and obligations from the banks.
The MPC should be writing to the Chancellor to point out not merely that monetary growth was too slow at the end of last year for comfort on activity, but also to point out that the sharp decline in sterling is a matter for concern and does prevent them lowering interest rates. Indeed they should not have lowered them as far as they already have. They could add that the government’s policy towards banking support is now one of the forces driving the pound down. In recent days similar fears about continental banks have adversely affected the Euro.
We need government action to control public spending, and to start to sort out the banks problems instead of just paying for the mistakes. We need higher indicative interest rates to encourage savers and debt repayment. Then we would have a safer background for monetary easing to get activity advancing again.
The likely exchange of letetrs with the MPC requesting permission to switch on the presses and the Chancellor likely to say “Yes” is a silly ritual designed to make you think the MPC is independent. If the MPC were truly independent they would tell the Chancellor a few home truths about the runaway borrowing and wasteful spending.
The MPC minutes mainly talk about activity, not inflation, despite their remit. They do acknowledge that the pound has lost one quarter of its value and this could affect inflation, but much of their discussion sounds like Gordon Brown telling us all it is a global rather than a UK problem. They conclude that the pound has fallen to rebalance the economy, and that it “could have been increased risk premia” – so that’s all right then!
They sign off by saying it was crucial “for the Chancellor to ensure that the government debt management policy would be consistent with the monetary policy actions of the Bank of England”. In this unintended side swipe at Brown’s “reforms” of the Bank they are pointing out that it is no use the MPC trying monetary easing if the government decides to sell huge quantities of its own debt! Well I never – why didn’t they think of that when they split up the Bank in 1997 and gave the power of issuing debt back to the Treasury?
In summary, I disagree with the present policy mix and think quantitative easing in these conditions would represent another worrying risk.