Guardian.co.uk: Paper promises on the economy

By Eamonn Butler (2 February 2009)

Published in The Guardian here

The government's jargon would have us believe it can save the UK. But more dodgy bank assets will only lead to inflation.

Gordon Brown says the government must use simpler language, because the credit crunch jargon confuses everyone. Well, in simple terms, we're bust and we're going to print money to make ourselves feel richer.

Alistair Darling has been rejecting all talk of "printing money". He doesn't want us to think that our money will go the way of Zimbabwe's. Even the thought of it is enough to make people sell Britain before it goes bust.

So he has no intention of giving up the jargon "quantitative easing" – which he's now given the Bank of England the green light to do – because it masks the inconvenient truth that, yes, the government is indeed printing money.

Of course, these days it is nothing so crass as just inking up new tenners. Instead, the Bank of England simply presses cash into the banks' hands in return for assets like shares and mortgage contracts. That gives the banks cash to lend to us, we go out and spend, and everything revives. QED.

But does it work? America's been doing it for months and there's little sign of borrowing or spending picking up. Japan did it for years without much effect on its own banking crisis. Some people think that the stimulus – about 5% of these nations' income – has not been enough to convince people to spend again. But then the risks of over-egging it are enormous.

The Bank of England already buys bank assets, but now it's proposing to buy much dodgier ones. So there is a fair chance of it using our money to buy a lot of worthless paper promises. Thanks, Alistair.

The most serious threat, though, is that we re-ignite inflation. Right now, prices are tumbling because everyone's confidence is shot. But if confidence comes back just as fast, we'll all be spending again – and with that huge wodge of Bank of England money in our pockets. So prices could well shoot up.

What worries me is not that, so much as whether our authorities have the bottle to rein things back in again. Governments like a bit of inflation: it gives spending, and business, a bit of a boost. But it's like a drug. To get the same high, you need increasingly large doses that ultimately kill you. So you eventually have to come off it, but you'll feel bad when you do. And governments don't like making their voters feel bad.

The risk with "quantitative easing" is that it could deliver a really big dose of inflation, and coming off that would make us feel particularly bad. Have our leaders the stomach for that, or will they let us drift into the destructive high-inflation low-output "stagflation" of the 1970s? Well, what do you think?

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