Of course, Alastair Darling has been denying for the last month that he’s not going to print money to get us out of this jam. He doesn’t want people to suspect that we are doing a Zimbabwe or a Weimar Republic – turning out so much cash that it soon becomes worthless. That would ruin savers and truly mess up the economy. Indeed, the mere threat that the government would risk it could make things worse – it would suggest that the situation was even worse than we feared, that the government was no longer creditworthy, and that everyone should sell Britain’s currency before it’s too late.
So Alastair Darling might just like to hang on to 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.
Another reason why that’s worrying is that it’s a last-ditch remedy. We’ve tried cutting interest rates to stimulate things. Now they’re rock bottom, but people still aren’t borrowing to buy new cars or bigger houses, and the banks aren’t exactly helping either. So like a cancer patient who’s tried everything and resorts to experimental drugs, we’re now resorting to experimental financial cures.
Of course, these days it is nothing so crass as just inking up new tenners. Instead, the Bank of England will press cash into people’s hands simply by buying assets from them. In practice, it simply buys assets like shares and mortgage contracts from the banks. That gives the banks cash they can lend to the rest of us. We go out and spend, and the economy revives. QED.
The Americans have been doing this for quite a few months already, though there is little sign of borrowing getting easier or spending going up. Japan’s experience isn’t heartening either: in response to the earlier crisis there, the central bank spent furiously and ended up with seven times the bank assets it started with, but nobody’s really sure it made much difference.
It’s possible that America and Japan simply haven’t done enough. In each case, the size of the boost has been not much more than 5% of these nations’ income – maybe not enough to convince people that the hard times are over. But the risks of over-egging it are enormous.
The Bank of England already buys bank assets, but usually it only buys the best. Now it’s proposing to buy a lot more, and buy much dodgier ones. So there is a fair chance that the Bank will be spending our money and ending up with a lot of worthless shares and paper promises. Thanks, Alastair.
The most serious threat, though, is the re-emergence of inflation. That’s not the problem right now, when prices are falling. But they’ve fallen rapidly, in the wake of a real drop in confidence about the future. What worries policymakers is that confidence could return just as rapidly. Then we’d all rush out to spend that extra cash the Bank’s given us, and prices would simply shoot up.
What worries me is not that. It’s whether our authorities can actually rein things back in again. Governments and central bankers rather like a bit of inflation: all that extra money makes us feel prosperous, encourages us to spend, and boosts business. But like a drug, the high you get from inflation only persists as long as you take larger and larger doses of it. And larger and larger doses are ultimately destructive. So eventually you have to kick it – and that makes you feel bad for a while. But governments don’t like making us voters feel bad, for obvious reasons.
The problem with ‘quantitative easing’ is that it could deliver a really big dose of inflation, and coming off a really big dose of inflation would make us feel particularly bad for some time. Do our political leaders really have the steel to curb that excess, or will they let us drift into the destructive high-inflation low-output ‘stagflation’ of the 1970s? Well, what do you think?
Money is an incredibly powerful tool. It shouldn’t be used to create a fake boom – as it’s been used in Britain and America for the last fifteen years – and it’s far too potent for economic fine-tuning. This downturn is exceptional, so maybe we should send it to work right now. But only if we believe ourselves strong enough to deal with the consequences, which could be highly destructive if they are not dealt with firmly.