On tuesday night I spoke at a Centre for Policy Studies event to remember Milton Friedman’s contribution to economics 100 years from his birth. Deepak Lal gave a forensic talk about the main contributions of Milton Friedman to the development of economic thought. Niall Ferguson powerfully and elegantly set Friedman in historical context, and explained the importance of his wider work popularising free enterprise friendly economics.
I drew on Friedman’s work in his Monetary History of the United States where he stressed the need to keep money growth at a sufficient level to prevent depression. His commentary on the monetary errors of the 1930s was seminal when he wrote it, and is influencing Mr Bernanke at the Fed as he fights the latest danger of recession in America.
I pointed out that the Coalition government offered a Plan A for recovery based on a tight fiscal policy, bringing the deficit down by reducing spending, and a loose monetary policy. This was the formula which has fuelled some successful past recoveries. We have discussed many times before the fiscal stance, where so far spending has gone up in real terms and new borrowing remains at high though reduced levels. I also pointed out that money growth is far from easy or loose.
Over the last year the growth of M4 lending has been around 1%. Broad money growth has also been sluggish. The large amounts of created money through the quantitative easing programmes has stuck within the banking and state credit system. Tough banking controls allied to some weak bank balance sheets has prevented this money being released into the private sector to power a faster private sector led recovery.
The figures beneath show the fast growth of QE money and the inability of the banks to use or pass this on:
M4 lending annualised growth Q2 2011 +0.1%
Q3 2011 +1.2%
Q4 2011 +1.6%
Q1 2012 +1.2%
Reserve balances June 2012 (12 months annualised) +77%
Notes and Coin June 2012 (12 months annualised) +5.9%
Plan A, tight fiscal and loose monetary policy for UK recovery was a good one. The problem is we are not getting either a tight fiscal or loose money stance.
For those interested, the three speeches are available on video through a link to the Centre for Policy Studies website.