Yesterday on both sides of the Atlantic there were hints that the current programmes of quantitative easing – printing money – will be the end of it. Both the Fed’s statement and the Governor implied that the existing sums pledged will be enough in their view.
In the UK the Governor also attacked the government’s public spending and tax plans.
“We are confronted with a situation where the scale of the deficits is truly extraordinary. This reflects the scale of the global downturn, but it also reflects the fact that we came into this crisis with fiscal policy on a path which wasn’t sustainable and a correction was needed”, he said.
The Governor is proving to be a shrewder politician than he has been a central banker. He may have misread the cycle badly, allowing too much money in 2003-6 and too little in 2007-8, but he is reading the political cycle well. He understands the forces that now are pushing us to lower public spending after the next Election, and realises that the special measures taken to ensure the sale of enough gilts this year may not be possible again thereafter. He is siding with the Chancellor and the Leader of the Opposition against the Prime Minister, and is even daring to criticise the PM for the size of the defict he built up as Chancellor in the “good times” before the crash.
On Tuesday I asked the PM what plans and timetable he had to reduce the deficit and end quantitative easing. I needed have bothered. I was treated to the usual highly politicised answer about the government doing what ever it takes, and the usual false contrast between the government who wants a recovery and an Opposition which wants cuts. The PM is now a parody of himself.
My question was a perfectly reasonable one. It is the question most economic commentators and market participants are asking. It was neither loaded nor party political. There ought to be an official answer to it, but the PM cannot bring himself to provide one. Instead he falls over his crude party politics, and seeks to underestimate everyone else’s intelligence. I suspect the true answer is that QE will end shortly when they have spent the £125 billion, and the deficit will be cut by a crisis Cabinet meeting immediately after the Election.
Meanwhile, the government moves on without the PM. You can feel power falling away from him. The UK establishment knows the deficit and current public sepnding levels are unsustainable. They realise that any incoming government after an Election will have to control public spending much mroe successfully than this one. The pity is we have another possible eleven months of spend and borrow on a huge scale, making the inevitable correction that much more difficult, and pushing us even further into debt than we need go. We feel the price of his soundbites on our shoulders.