In opposition Mr Cable told us “the road to Harare is not as long as we might hope”. Widely reported then as a staunch opponent of printing money, owing to his colourful language about “Mugabe economics”, his argument was more hedged if you actually read what he said. He recognised that monetary easing was a judgement. You could have too much of it.
Today in government Mr Cable has throw caution to the winds. He backs more money printing. He is urging the so called independent Monetary Policy Committee to print some more. Is he right to do so? What are the dangers?
Remember the deal – this Coalition government was to offer us a tight fiscal policy in return for the Bank offering us looser monetary policy. The government would control excess spending in the public sector, and allow the banks to fuel a private sector led recovery on the back of cheap money.
I have no problem with the theory. I just have some doubts about whether that is what we are getting. Last month the UK government borrowed a record amount for an August – £15.9 billion – up from £ 14 billion a year earlier. Tax revenues were up, so the increased deficit was the result of higher spending. That does not sound like a tight fiscal policy yet. If the media stopped saying there had been big and premature cuts in overall public spending it might be possible to have a more informed debate about what is going wrong with the UK economy.
Nor do I see the loose money policy for the private sector. Reports continue of small and medium sized companies finding access to new borrowing difficult. The very low interest rates only apply to the government. All the time we have some weak banks, and banks generally under strong regulatory requirements to increase their cash and capital, we will not have an adequate supply of new lending to fuel the private sector led recovery.
I do not see how another round of creating money to buy up government debt would help much. The government interest rate is already low. It will not of itself unblock credit to SMEs or to the private sector generally. We need to fix the state banks, and to improve the banking sector’s position to do that.
I do see some downside from more QE. The obvious danger is more inflation. I thought the Monetary Policy Committee were meant to keep inflation to 2% on the CPI. They seem to have abandoned all attempts to do that any time soon. Their loose talk about possibly having another bout of money printing has already triggered a slide in the pound against the dollar.
Don’t they realise that it was the huge devaluation in part brought on by QE1 that produced the high inflation we are now suffering? Don’t they see the danger of yet more weakness in our currency bringing on yet more inflation? In an economy which imports as much as ours it is no good saying they have domestic inflation under control. Go into any shop and see how many things we now import from the emerging markets of the world, and see how vulnerable our living standards are to a weaker pound.
Inflation is a kind of theft. High inflation is an unfair tax on the savers and strivers, and a windfall to the borrowers. I appreciate the main borrower is the government. That is all the more reason the MPC should for once stand up for the savers, and say “No” to anything which would undermine the pound and rob the prudent.
The government should also understand that high inflation this year is itself damaging recovery prospects. It is big price rises for enegry and other essential items that leaves people with too little money to buy the goods and services which would create faster growth. As inflation makes people poorer, so they can afford less tax, which leaves the government unable to afford all its spending. Money printing may not yet be a short road to Harare, but it is far from helpful to a private sector led recovery.
Recovery requires the government to fix the banks it owns, and make a bigger contribution to creating a strong and expanding banking sector serving the domestic UK market. Without that growth will continue to disappoint and QE will not get round that fundamental problem. Savers will worry about “Mugabe economics”, which is not good for confidence.