Does the Bank of England's new policy of quantitative easing – printing money, as you or I might call it – threaten us with future inflation, or is it a vital tool to dig us out of deflation? We have debates about it at the Adam Smith Institute, and I even have debates with myself.
This week's inflation figures have done nothing to quell the debate. Though falling house prices and interest rates mean that the Retail Price Index is zero, prices are still not exactly falling. And on the government's preferred Consumer Price Index, prices are still way above the Bank of England's target, at 3.2%. So the Bank is printing money at exactly the same time as the Governor is being forced to write to Gordon Brown to explain why prices are rising so fast.
Of course, the point is that there is a lag between monetary policy and its effects. It can be months, even years. So if you expect prices to fall in the future – as the Bank does – you need to take action now. Hence quantitative easing.
But: will prices fall? And if so, how much? Sure, there are a lot of cash-strapped businesses out there, slashing their prices in order to keep afloat. But many prices seem quite resistant to falling. Food is expensive, which is why supermarkets are some of the only companies making any money. Oil seems to be bottoming out at around $40 a barrel. A 28% drop in the value of the pound in the last 18 months has made imported goods much more expensive. And interest rates can't drop much more.
Money is a sledgehammer, far too massive to be used for fine-tuning. It should grow at a smooth, fixed rate. But the money supply has fallen dramatically over the last year, so arguably, it must be rebuilt. The lag is the snag. If prices are indeed stickier than the Bank thinks, then today's quantitative easing may simply force them up again. If confidence and the economy recovers faster than it expects, it could end up inflating into a recovery and setting off another inflationary boom.
Even if the Bank is right, will it be able to detect the recovery early enough to take its foot off the accelerator. And would it want to? Politicians and central bankers rather like booms. That's why we are in this mess.