THE AIM OF my economic commentary is to provide a longer term, more balanced perspective on economic developments than is sometimes offered by the 24/7 rolling news cycle, where today’s lurid headlines of impending disaster often metamorphose into tomorrow’s fish and chip paper. But while headline news often proves to be of no lasting consequence, sometimes a piece of news barely reported at the time turns out to be of great significance to the welfare of the ordinary citizen.
So may it prove with a speech given by the Governor of the Bank of England, Sir Mervyn King, on October 23rd.
The speech, which was barely noted in the popular media, may mark a decisive turning point in UK monetary policy. For in it, Sir Mervyn signalled the possible end of Quantitative Easing.
“Printing money is not simply manna from heaven,” commented Sir Mervyn, adding that, “The Monetary Policy Committee will think long and hard before it decides whether or not to make further asset purchases.”
The speech is the first public recognition that QE may be ineffective as a means of stimulating economic recovery, as our commentary has consistently argued. Three and a half years after the QE programme was first initiated in the UK, an increase in the monetary base of £375 billion, or 25% of UK GDP, has utterly failed to stimulate the growth that its advocates confidently predicted. Instead, the British economy has remained mired in a stagflationary recession.
The reasons for the failure of QE were analysed in comments on ThinkScotland on August 14th (“Quantitative strangling:Why QE is hurting the economy not saving it”), here on August 27th, here on September 13th, and in Chapter 10 of my book, The Golden Guinea.
Some of the reasons were spelt out by Dr Ros Altmann, Director-General of Saga. Writing in the Financial Times on October 24th, Dr Altmann observed that,
“To millions of households, Bank of England policies have felt like a tax increase…. (They have) reduced current and prospective pension incomes and savers’ nominal and real incomes.”
She went on to add that, “Saga Surveys since 2010 have consistently flagged that consumption cutbacks are the response of the over-50s to falling real incomes. Over-50s represent nearly half of all consumer spending.”
QE – so far from stimulating consumer spending – has actually depressed it, and so hampered economic recovery. Dr Altmann concluded that, “In the face of the economic evidence, should we not consider the possibility that the extreme monetary policies put in place to try and generate growth have actually had the opposite effect?”
Exactly. So if the Governor of the Bank of England is finally beginning to recognise the perverse impact of QE on consumer spending it is good news. Belatedly, Sir Mervyn seems to have become a convert to the Austrian School. Purging bad debts and reducing the capital of banks that lent recklessly in the bubble years leading up to 2007, such as RBS and HBOS here in the UK, is an inevitable – and indeed necessary – process to lay the foundations of a sustainable recovery.
As long as new banks are allowed to enter the market, without the baggage of the broken behemoths, lending to business and households will gradually revive. And this seems to be happening. New players are emerging untainted by the errors of the pre-2008 period, such as Virgin Money, the Co-op Bank, OneSavings and the Tesco and Sainsbury Banks. As commented on August 20th, these banks are gaining market share at the expense of RBS and Lloyds HBOS. The main risk is that this process of adjustment will be hampered by inept over-regulation of newer, smaller banks. But even here there are signs of hope, with the Financial Times reporting on October 26th that British regulatory authorities now have a “goal of removing barriers to entry and spurring more competition in Britain’s highly concentrated banking sector”.
So there are modest reasons for optimism that British monetary policy is slowly being put onto a sound footing. The risk is that, if QE is revived, it will cause further distortions and drive the UK back into recession. But if the Bank of England does indeed call a final halt to QE, my prediction would be for a gradual sustained recovery in the UK.