Printing money is not the solution
With another £40bn disappearing down the black hole known as the British Banking sector, the financial cost of the economic and banking collapse is now only rivaled by the two World Wars in it’s cost to the UK taxpayer. Rather than going to support credit to business or households, the further £25bn of “newly printed money” announced today is likely to go to help prop up the Government debt mountain.
The above chart shows how the Bank of England has been using quantative easing since March. 98.8 per cent has been used to purchase Gilts. As fast as the Debt Management Office “sells” Gilts to the “market”, the Bank of England shows up and buys them. The investment banks have been making a nice turn in recent months out of transferring money from one arm of the Government to another. The fact the new money is being laundered back to the Government via the investment banks does not change the economic reality of this process: the Bank of England is financing the Government’s debt needs via printing money in the manner of the Weimar Republic and Zimbabwe.
The above chart shows who has bought and sold Gilts since the Bank of England started its money printing programme. The only buyer of Government debt in the UK has been the Government itself. All other investors have used the Bank of England’s buying as a route to exit. With the Bank finally acknowledging that a collapsing currency, soaring oil price and consumption taxes may lead to rising inflation in the coming months, its ability to continue rolling the printing press is going to be increasingly difficult.
The belief that lack of money supply is the key restraint on the UK economy, which is being used as the cover for financing the deficit in this way, is misguided. Rather than simply expanding the amount of money in the economy and giving it all to the Government, economic policy needs to be directed at restoring the flow of credit and reducing the cost of existing debt for the private sector. If the Bank was serious about using new money to improve credit availability, they could have followed the example of the Federal Reserve and European Central Bank in directing asset purchases to mortgage and credit related assets. The vast majority of Fed asset purchases were of mortgage bonds.
The key problem the UK private sector faces is a lack of credit due to a bust banking system. The above chart shows the average rate on a new mortgage taken out in the UK each month – this has stuck resolutely around 4.4% since the money printing programme was launched in March. Net lending growth also remains floored. Without a well functioning credit intermediary, the private sector simply can’t recover. The fix to this is not printing money to fund government deficits, but to fully resolve the bad debt and capital issues of the banking sector. With the Federal Reserve in the US now stepping back from its money printing to purchase assets, the UK is left alone now in its printing money “solution” to the recession. The Bank risks collapsing the Pound through further printing and a surge in inflation; the practice is amplifying rather than resolving the UK’s economic crisis.
http://www.spectator.co.uk/coffeehouse/5508853/printing-money-is-not-the-solution.thtml
With another £40bn disappearing down the black hole known as the British Banking sector, the financial cost of the economic and banking collapse is now only rivaled by the two World Wars in it’s cost to the UK taxpayer. Rather than going to support credit to business or households, the further £25bn of “newly printed money” announced today is likely to go to help prop up the Government debt mountain.
The above chart shows how the Bank of England has been using quantative easing since March. 98.8 per cent has been used to purchase Gilts. As fast as the Debt Management Office “sells” Gilts to the “market”, the Bank of England shows up and buys them. The investment banks have been making a nice turn in recent months out of transferring money from one arm of the Government to another. The fact the new money is being laundered back to the Government via the investment banks does not change the economic reality of this process: the Bank of England is financing the Government’s debt needs via printing money in the manner of the Weimar Republic and Zimbabwe.
The above chart shows who has bought and sold Gilts since the Bank of England started its money printing programme. The only buyer of Government debt in the UK has been the Government itself. All other investors have used the Bank of England’s buying as a route to exit. With the Bank finally acknowledging that a collapsing currency, soaring oil price and consumption taxes may lead to rising inflation in the coming months, its ability to continue rolling the printing press is going to be increasingly difficult.
The belief that lack of money supply is the key restraint on the UK economy, which is being used as the cover for financing the deficit in this way, is misguided. Rather than simply expanding the amount of money in the economy and giving it all to the Government, economic policy needs to be directed at restoring the flow of credit and reducing the cost of existing debt for the private sector. If the Bank was serious about using new money to improve credit availability, they could have followed the example of the Federal Reserve and European Central Bank in directing asset purchases to mortgage and credit related assets. The vast majority of Fed asset purchases were of mortgage bonds.
The key problem the UK private sector faces is a lack of credit due to a bust banking system. The above chart shows the average rate on a new mortgage taken out in the UK each month – this has stuck resolutely around 4.4% since the money printing programme was launched in March. Net lending growth also remains floored. Without a well functioning credit intermediary, the private sector simply can’t recover. The fix to this is not printing money to fund government deficits, but to fully resolve the bad debt and capital issues of the banking sector. With the Federal Reserve in the US now stepping back from its money printing to purchase assets, the UK is left alone now in its printing money “solution” to the recession. The Bank risks collapsing the Pound through further printing and a surge in inflation; the practice is amplifying rather than resolving the UK’s economic crisis.
http://www.spectator.co.uk/coffeehouse/5508853/printing-money-is-not-the-solution.thtml
So since March the Bank has printed around £175bn of this extra cash, and virtually all of it has gone to buy government debt.
Now, by some spooky coincidence, £175bn just happens to be exactly what the government projected in its April Budget as being its total borrowing this year. And by an even spookier coincidence, today's announced £25bn increase in QE for the rest of the year just happens to be the borrowing overrun the government will announce in its forthcoming Pre-Budget Report (don't believe me? just watch).
Yes, we really have got a government financing the largest budget deficit in the developed world by running the printing press.
And even if we somehow manage to put the whole process into reverse before inflation takes off, the Bank will then be attempting to sell back all the gilts it's now buying at a time when the government is still issuing shedloads. Which is a surefire recipe for a huge hike in gilt yields (long-term interest rates), and an explosion in government debt interest costs.
And you know the really odd thing? Virtually the entire economics establishment seems to think it's fine. Indeed, Tyler has just listened to the New Statesman's economics correspondent telling BBC R5 listeners that it's a "no-brainer". Even though there's virtually no evidence QE is supporting the economy as intended, and even though he couldn't explain how the Bank would ever know when to stop.
Very scary.
Extraordinary measures like QE may have been justified while it looked like we were tipping into the Second Great Depression. But we are through that now. What we are looking at from here is a miserable decade of slow grinding recovery. It may even turn out to be a Japanese-style "lost decade".
But it is a dangerous delusion to think we can get ourselves back on a growth path by running high budget deficits financed with a supercharged printing press. That is the age-old recipe for inflation, crises, and decline.
Instead, we need to listen to Sir Stu. We really are skint, and we really do need to take some hard decisions to refill the coffers. And just so we know, here they are:
Public spending must be cut by around 15% (ie £100bn pa)
Taxes on enterprise and employment must be slashed - we have to earn our way back to prosperity
Nobody's saying it will be easy. It won't.
But continuing to print money in the vague hope that we can somehow get the economy back to sustainable growth is going to make our longer term problems a whole lot worse.
*Footnote Yes, OK, the government has continued to issue gilts. But since the Bank has been buying them back at the same time, in effect, net issuance has been close to zero.