Bank of England seeks money printing powers
The Bank of England’s Monetary Policy Committee has voted unanimously to seek Government permission to increase the amount of money in the economy as interest rate cuts lose their power to fight recession.
The 9-0 vote by the MPC was revealed in the minutes of the meeting held on February 5. The Bank’s Governor Mervyn King will now write to Alistair Darling, the Chancellor, to ask for approval to introduce measures aimed at raising the supply of money in the economy – known as quantitative easing. The Bank hopes that by increasing the quantity of money in the economy it can encourage banks to increase lending and consumers to start spending.
“The lack of supply credit is the biggest problem facing the UK economy and increasing the supply of central bank money via purchases of government securities should help to loosen these restrictions,” said Andrew Goodwin, Senior Economic Adviser to the Ernst & Young Item Club.
Henry Law comments
This is the next step towards hyperinflation. At present, the statistics show a decline in the rate of inflation, though this is not turning up in retail prices of items like food, which have risen sharply, in part due to the adverse exchange rate. The risks are that, first, the government’s own revenues are falling whilst its costs are rising; second, that as businesses close, manufacturing capacity is being lost, which will not be quickly reinstated. The point could come when too much money is chasing too few goods; and third, that foreigners may decide to ditch sterling on a large scale, leading to a collapse in foreign exchange markets. And by the time the effect starts to show, it will be too late to pull back.
The policy is in any case based on the same fallacies that have been driving economic policy through the past decades. Consuming for the sake of it and on an ever-increasing scale is not an end in itself and cannot drive an economy. This is part of the Gross National Product delusion. People may cut back their spending and might even feel better for it, which means there is less work to be done in the formal economy. The question then boils down to making sure that everyone has work opportunities so that they can produce roughly as much as they consume, though at a reduced aggregate level.
Neither is increased lending desirable in itself. It is only desirable if the lending is for the purchase of things which will increase the capacity to produce things that people are willing and able to buy. This rule out lending for land purchase, or for the production of, say, luxury muscle cars, or the seemingly endless product differentiation of simple detergent liquids sold as hair shampoos.
In Britain’s case, the need is so obviously for dealing with the inadequacies of the country’s infrastracture, that there is no shortage of projects to keep everyone at work. There would be no harm done if printed money were to be spent on this, provided that the projects were worth doing for their own sake. Some of them have a long lead time, but many do not. It does not take much time to get local authorities to deploy teams of people to mend potholes and broken pavements. It is also the case that there are many major infrastructure schemes which have been deferred for lack of funds and could be brought forward. Network Rail has a long wish-list of schemes for electrification, track doubling and reopening, for which no land needs to be acquired and no public enquiry would be called for.
In a few years’ time, these projects will result in enhanced land values. If the government were now to put in place the necessary legislation for land value taxation as the Campaign advocates, then by the time this work is finished, the machinery will be in place for collecting the value created and paying back the cost of the work. Otherwise, the burden will fall yet again on productive enterprise – thereby hindering economic recovery – or on savers who will end up penniless.